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Year: 2009

Co-operative society : Deduction u/s. 80P(2)(a)(i) of I. T. Act, 1961 : A. Y. 1995-96 : Society engaged in procuring raw silk and marketing to its members: Interest received from members for supplying materials on credit : Entitled to deduction.

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  1. Co-operative society : Deduction u/s. 80P(2)(a)(i) of I.
    T. Act, 1961 : A. Y. 1995-96 : Society engaged in procuring raw silk and
    marketing to its members: Interest received from members for supplying
    materials on credit : Entitled to deduction.



 


[CIT vs. Tamil Nadu Co-operative Silk Producers Ltd.;
311 ITR 224 (Mad)].

The assessee was a cooperative society engaged in the
business of procuring raw silk and twisted silk and marketing it to its
members. The assessee received interest from its members in respect of
material supplied on credit. For the A. Y. 1995-96 the Assessing Officer
rejected the claim of the assessee that the interest so received from the
members is deductible u/s. 80P(2)(a)(i) of the Income-tax Act, 1961. The
Assessing Officer held that the activity of the society in procuring and
supplying raw silk and twisted silk on credit to its members could not be
considered as “carrying on the business of banking or providing credit
facilities within the meaning of section 80P(2)(a)(i)”. The Tribunal allowed
the assessee’s claim.

On appeal by the Revenue, the Madras High Court upheld the
decision of the Tribunal and held that the assessee co-operative society was
eligible for the benefit of section 80P(2)(a)(i) of the Act in respect of the
interest received from its members for supplying the materials on credit.

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Convergence with International Financial Reporting Standards (‘IFRS’) — Impact on fundamental accounting practices and regulatory framework in India

IFRS — fast gaining adoption and acceptance globally :

The use of International Financial Reporting Standards (IFRS) as a universal financial reporting language is gaining momentum across the globe, especially as compared to a few years ago where a number of different national accounting standards existed. More than 100 countries now require or allow use of IFRS and by 2011 the number is expected to increase to 150. Some of the major countries that are seeking to converge/adopt IFRS by 2011 include Canada, Korea, India and Brazil.

The last two years have also seen significant momentum in the United States on converging from US GAAP to IFRS. The momentum started with the US Securities and Exchange Commission allowing foreign companies listed in the US to file financial statements prepared in accordance with IFRS (without a reconciliation to US GAAP) and continued with a proposal to evaluate IFRS convergence for all US Listed companies between 2014 and 2016.

Convergence with IFRS in India :

In line with the global trend, the Institute of Chartered Accountants of India (ICAI) has proposed a roadmap for convergence with IFRS for certain defined entities (listed entities, banks and insurance entities and certain other large-sized entities) with effect from accounting periods commencing on or after April 1, 2011. Large-sized entities are defined as entities with turnover in excess of Rs.100 crores or borrowings in excess of Rs.25 crores.

Accordingly, as part of its convergence strategy, the ICAI has classified IFRS into the following broad categories :

Category I : IFRS which can be adopted immediately or in the immediate future in view of no or minor differences (for example, construction contracts, borrowing costs, inventories).

Category II : IFRS which may require some time to reach a level of technical preparedness by the industry and professionals, keeping in view the existing economic environment and other factors (for example, share-based payments).

Category III : IFRS which have conceptual differences with the corresponding Indian Accounting Standards and where further dialogue and discussions with the IASB may be required (consolidation, associates, joint ventures, provisions and contingent liabilities).

Category IV : IFRS, the adoption of which would require changes in laws/regulations because compliance with such IFRS is not possible until the regulations/laws are amended (for example, accounting policies and errors, property and equipment, first-time adoption of IFRS).

Impact of IFRS convergence on fundamental accounting practices :

Harmonising existing Indian accounting standards with IFRS will have an impact on some fundamental accounting practices followed in India. A few of these are enumerated below:

Use of fair value concept :

Indian GAAP requires financial statements to be prepared on historical cost except for fixed assets which could be selectively revalued. Use of fair value is presently limited for testing of impairment of assets, measurement of retirement benefits and ‘mark-to-market’ accounting for derivatives. Under IFRS, there is a growing emphasis on fair value. In addition to the requirements under Indian GAAP, the carrying amounts of the following assets and liabilities are based on fair value under IFRS :

  •     Initial recognition of all financial assets and financial liabilities is at fair value

  •     Subsequent measurement of all derivatives, all financial assets and financial liabilities held for trading or designated at fair value through profit or loss, and all financial assets classified as available-for-sale, are measured at fair value

  •     Non-current provisions are measured at fair value, which is derived by discounting estimated future cash flows

  •     Share-based payment awards are measured at fair value

  •     Option available for measurement of property, plant and equipment at fair value, subject to certain conditions

  •     Option available for measurement of intangible assets at fair value, subject to certain conditions

  •     Option available for measurement of Investment property at fair value.

Substance over form :

Considering the overall theme of substance over form, IFRS mandates preparation of consolidated financial statements to reflect the true picture of the net worth to various stakeholders. Exceptions for preparation of consolidated financial statements are very limited. In India, currently consolidated financial statements are mandatory only for listed companies and that also only for the annual financial statements and not the interim financial statements.

Similarly, Indian accounting continues to be driven by the written contract and the form of the transaction – as opposed to the substance. Consider, upfront fees charged by a telecom service provider. Under Indian GAAP, several companies recognise such up front fees as income because it is contractually non-refundable and is contractually received as fees for the activation process. Under IFRS, the fee is accounted for in accordance with the sub-stance of the transaction. Under this approach, the customer pays the upfront activation fee not for any service received by the customer, but in anticipation of the future services from the telecom company. Thus, despite the non-refundable nature of the fees, revenue recognition would be deferred over the estimated period that telecom services will be provided to the customer.

Inconsistencies with existing laws and regulations:

As per the preface to the Indian accounting standards, if a particular accounting standard is found to be not in conformity with a law, the provisions of the said law will prevail and the financial statements shall be prepared in conformity with such law. However, under IFRS, the entity needs to comply with all the accounting standards and other authoritative literature issued by IASB in order to comply with IFRS. If entities adopt accounting practice as approved by another regulatory authority or in conformity with a law, which is not in accordance with IFRS, the financial statement so prepared would not be considered to be in compliance with IFRS.

Disclosures:

In India, Schedule VI to the Companies Act, 1956, which prescribes a detailed format for preparation and disclosure of financial statements, lays great emphasis on quantitative information such as quantitative details of sales, amount of transactions with related parties, production capacities, CIF value of imports and income and expenditure in foreign currency, etc. Contrary to the same, IFRS is more focused on qualitative information for the stakeholders, such as terms of related party transactions, risk management policies, currency exposure for the entity with sensitivity analysis,etc. To more correctly report the liquidity position of the entity, IFRS also . requires segregation of all assets/liabilities into current and non-current portions. Presently under Indian GAAP even long-term deposits and advances are disclosed under current assets, loans and advances, thereby not reflecting the true position.

Exceptional  and extraordinary    items:

Indian GAAP requires companies to disclose significant events which are not in the ordinary course of business as extraordinary items and material items as exceptional to facilitate the reader to consider the impact of these items on the reported performance. Under IFRS there is no concept of extraordinary or exceptional since all events/transactions are in the normal course of business and if an item is material, it can be disclosed separately, but cannot be termed as ‘extraordinary’ or ‘exceptional’.

Restatement of financial statements:

Under Indian GAAP, changes in accounting policies or rectification of errors (prior period items) are recognised in the current year’s profit and loss account (for errors) and are generally recognised prospectively (for changes in accounting policies). Under IFRS, the prior period comparatives are re-stated in both cases. Indian GAAP does not have the concept of restatement of comparatives except in case of special-purpose financial statements prepared for public offering of securities.

Determination of functional currency:
 
Entities in India prepare their general purpose financial statements in Indian rupees. However under IFRS, an entity measures its assets, liabilities, revenues and expenses in its functional currency, which is the currency that best reflects the economic substance of the underlying events and circumstances relevant to the entity i.e.,the currency of the primary economic environment in which the entity operates. Functional currency of an entity may be different from the local currency.

For example, consider an Indian entity operating in the shipping industry. For such an entity it is possible that a significant portion of revenues may be derived in foreign currencies, pricing is determined by global factors, assets are routinely acquired from outside India and borrowings may be in foreign currencies.  All these factors need  to be considered to determine  whether  the Indian rupee is indeed the functional   currency  or whether   another  foreign currency  better  reflects the economic  environment that most impacts  the entity.

Other significant aspects  :

Under Indian GAAP, provision has to be made for proposed dividend, although it may be declared by the entity and approved by the shareholders after the balance sheet date. Under IFRS, dividends that are proposed or declared after the balance sheet date are not recognised as liability at the balance sheet date. Proposed dividend is a non-adjusting event and is recorded as a liability in the period in which it is declared and approved.

Impact  of existing laws  and  regulations:

Accounting standard-setting in India is subject to direct or indirect oversight by several regulators, such as the National Advisory Committee on Accounting Standards (NACAS) established by the Ministry of Corporate Affairs, the Reserve Bank of India (RBI),the Insurance Regulatory and Development Authority (IRDA) and the Securities and Ex-change Board of India (SEBI). Further, the Indian Companies Act, ;1956 (the Act) directly provides guidance on accounting and financial reporting matters. Courts in India also have the powers to endorse accounting for certain transactions – even if the proposed accounting treatment may not be consistent with Generally Accepted Accounting Principles.
 
Companies Act:

The requirements of Schedule VI of the Act, which currently prescribes the format for presentation of financial statements for Indian companies, is substantially different from the presentation and disclosure requirements under IFRS. For example, the Act determines the classification for redeemable preference shares as equity of an entity, whereas these are to be considered as a liability under IFRS. Also, Schedule XIV of the Act provides minimum rates of depreciation – such minimum depreciation rates are also inconsistent with the provisions of IFRS.

Regulatory  guidelines  :

The Reserve Bank of India (RBI) and Insurance Regulatory and Development Authority (IRDA) regulate the financial reporting for banks, financial institutions and insurance companies, respectively, including the presentation format and accounting treatment for certain types of transactions. For example, the RBI provides detailed guidance on provision relating to non-performing advances, classification and valuation of investments, etc. Several of these guidelines currently are not consistent with the requirements of IFRS.

The Securities and Exchange Board of India has also prescribed guidelines for listed companies with respect to presentation formats for quarterly and annual results and accounting for certain transactions, some of which are not in accordance with IFRS e.g., Clause 41 of the Listing Agreement permits companies to publish and report only standalone quarterly financial results, however IFRS considers only consolidated financial statements as the primary financial statements for reporting purpose.

Court procedures:

Courts in India commonly approve accounting under amalgamation/restructuring schemes, which may not be in accordance with the accounting principles/standards. Under the current accounting/ legal framework such legally approved deviations from the accounting standards/principles are acceptable.

Income tax:

Computation of taxable income is governed by detailed provisions of the Indian Income Tax Act, 1961. Convergence with IFRS will require significant changes/ clarifications from the tax authorities on treatment of various accounting transactions.

For example, consider unrealised losses and gains on derivatives that are required to be marked-to-market under IFRS. Different taxation frameworks are possible for the tax treatment of such unrealised losses and gains. The treatment of such unrealised losses/ gains will need to be addressed in line with the convergence time frame. It is imperative that tax authorities are engaged sufficiently in advance to decide on such critical aspects of taxation.

One of the risks of IFRS convergence without adequate involvement of all stakeholders and adequate regulatory changes is that financial statements prepared using the’ converged’ Indian standards may still not fully comply with IFRS issued by the International Accounting Standards Board (IASB). This would be very unfortunate as Indian entities that may be required to present IFRS-compliant financial statements to stakeholders outside India (overseas stock exchanges, overseas regulators, investors and alliance partners) would still need to reconcile with such’ converged’ IFRS financial statements prepared using the Indian framework, with IFRS financial statements that are globally accepted.

Accordingly, at the onset of the convergence, there is a need to develop an enabling regulatory frame-work and infrastructure that would assist and facilitate IFRS convergence. The Government would need to frame and revise laws in consultation with the NACAS and the ICAL Similarly, regulators such as the RBI, IRDA and SEBI would need to consider accepting IFRS in substitution of the present set of specific accounting rules prescribed by them.

As the timelines for convergence approach, all entities will have to consider their own roadmap and gear up for complying with the GAAP differences. Convergence to IFRS will be time-consuming, challenging and will require complete support and sponsorship of the Board of Directors/Members of Audit Committee/Senior Management. Given the task and challenges, all entities should ensure that their convergence plans are designed in a manner to achieve the objective of doing it once, but doing it right.

Substantial Question of Law — Whether reassessment made without issue of notice u/s.143(2) of the Act is invalid, is a substantial question of law.

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 13 Substantial Question of Law — Whether
reassessment made without issue of notice u/s.143(2) of the Act is invalid, is a
substantial question of law.


[L. N. Hota and Company v. CIT, (2008) 301 ITR 184
(SC)]

The Assessing Officer issued a notice on 3-12-1998 to the
assessee u/s.148 of the Act, requiring the assessee to file the return of its
income for the A.Y. 1997-98, which was served on 7-12-1998. The assessee filed
the return of income on 5-1-1999, whereafter the AO issued a notice u/s.142(1)
on 28-6-2000. The AO, vide his order dated 27-11-2000, completed the assessment
estimating the income of the assessee from the business by applying the
provisions of S. 145 of the Act. The assessee’s appeal was dismissed by the
Commissioner of Income-tax (Appeals) vide his order dated 4-1-2002 without
adjudicating the issue of legality of the assessment. An application u/s.154 was
also rejected by the Commissioner of Income-tax (Appeals) vide his order dated
25-2-2002. The Tribunal vide its order dated 13-4-2004, rejected the priority
prayer of the assessee that assessment made without issuance of notice
u/s.143(2) within a period of one year was invalid, but on the merits of the
case, remanded the matter to the AO. On appeal, the Orissa High Court in its
order dated 14-8-2006 dismissing the appeal held that as the assessment order
had not come about by way of scrutiny, the provisions of S. 143(2) would not be
applicable. On an appeal by way of special leave to the Supreme Court, it was
held that though the question of the applicability of S. 143(2) was specifically
raised throughout, prima facie, no finding based on law as it stood, had
been recorded. The Supreme Court therefore remitted the matter to the High Court
for a fresh decision in accordance with the law.

 

 

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Assessment — Prima facie adjustments — When there are conflicting judgments or interpretations of a Section, prima facie adjustment contemplated u/s.143(1)(a) was not applicable and in such cases there was no liability to pay additional tax u/s.143(1A).

New Page 17 Assessment — Prima facie adjustments — When
there are conflicting judgments or interpretations of a Section, prima facie
adjustment contemplated u/s.143(1)(a) was not applicable and in such cases
there was no liability to pay additional tax u/s.143(1A).

[Kvaverner John Brown Engg. (India) P. Ltd. v.
ACIT, (2008) 305 ITR 103 (SC)]

During the relevant assessment years, the
appellant claimed deduction u/s.80-0 in respect of qualifying income brought
into India in convertible foreign exchange. In its return, the appellant
indicated the qualifying income as the gross figure. By way of adjustment
u/s.143(1)(a), the Income-tax Officer restricted the qualifying income to the
net figure. In other words, the assessee claimed the gross income earned in
foreign exchange as the qualifying income, whereas the Income-tax Officer
granted deduction by restricting the claim of the assessee to the net income.

On December 17, 1997, whether the eligible income
should be taken at the gross figure or net figure, was the question for
interpretation. There were several conflicting decisions on this point.
Therefore, according to the appellant, S. 143(1)(a) was not applicable and
consequently the appellant was not liable to pay the additional tax
u/s.143(1A).

The Supreme Court observed that the only point
raised by the appellant was that it was not liable to pay additional tax, as
S. 143(1)(a), as it stood during the relevant year, was not applicable to the
facts of this case, because a moot point had arisen which could not have been
a matter for adjustment under that Section and which point needed
consideration and determination only under regular assessment vide S. 143(3)
of the 1961 Act. The Supreme Court held that for the A.Ys. 1996-97 and 1997-98
with which it was concerned, one of the main conditions stipulated by way of
the first proviso to S. 143(1)(a), as it stood during the relevant time,
referred to prima facie adjustments. The first proviso permitted the
Department to make adjustments in the income or loss declared in the return in
cases of mathematical errors or in case where any loss carried forward or
deduction or allowance which on the basis of information available in return
was prima facie admissible, but which was not claimed in the return or
in cases where any loss carried forward or deduction or allowance claimed in
the return which on the basis of information available in the return, was
prima facie inadmissible. In the present case, therefore, when there were
conflicting judgments on interpretation of S. 80-0, the Supreme Court was of
the view that prima facie adjustments contemplated u/s.143(1)(a) were
not applicable and therefore the appellant was not liable to pay additional
tax u/s.143(1A) of the Act.

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Appeal to the High Court — Finding of facts recorded by the Tribunal that machinery was not idle for the entire block period — hence it was not necessary to go into the connotation of the word ‘used’ appearing in S. 32 of the Act.

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6 Appeal to the High Court — Finding of facts
recorded by the Tribunal that machinery was not idle for the entire block period
— hence it was not necessary to go into the connotation of the word ‘used’
appearing in S. 32 of the Act.

[Dy. CIT v. N. K. Industries Ltd., (2008)
305 ITR 274 (SC)]

The Supreme Court was concerned with the block
period April 1, 1988, to February 24, 1999. The main contention advanced on
behalf of the Department was that for allowance of deduction for depreciation,
the asset must not only be owned by the assessee but it must also be used for
the purposes of business or profession of the assessee. It was the case of the
Department that the word ‘used’ in S. 32 of the Income-tax Act, 1961, refers to
actual use of the asset; that having regard to the scheme of the Income-tax Act,
1961, and particularly, after the introduction of the concept of ‘block of
assets’, actual use is the only requirement apart from ownership for allowance
of depreciation u/s.32. It was also the case of the Department that an important
question of law arose for determination before the High Court; that the High
Court has failed to examine the said question; and that it had erred in
dismissing the tax appeals only on the ground that no substantial question of
law had arisen.

The Supreme Court observed that in the present
case, the Tribunal had examined the statements of certain witnesses and after
analysing the material on record, it had come to the conclusion on facts that
there was nothing to show that the machinery, namely, expellers remained idle
for the entire block period April 1, 1988 to February 24, 1999. The Supreme
Court after having examined the record itself, agreed with the view expressed by
the Tribunal on the facts of the present case. The Supreme Court was of the view
that hence, it is not necessary for it to go into the larger question of law
regarding the connotation of the word ‘used’ appearing in S. 32 of the
Income-tax Act, 1961. The Supreme Court dismissed the appeal for the aforesaid
reasons. The question of law was however kept open.

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Depreciation — Higher depreciation could not be allowed on the motor trucks used in business of running them on hire, unless there is an evidence that the assessee was in the business of hiring out motor vehicles.

New Page 15 Depreciation — Higher depreciation could not
be allowed on the motor trucks used in business of running them on hire,
unless there is an evidence that the assessee was in the business of hiring
out motor vehicles.

[CIT v. Gupta Global Exim P. Ltd., (2008)
305 ITR 132 (SC)]

The Assessing Officer (AO) took the view that the
assesseé was, during the relevant assessment year, in the business of timber
trading and it was only occasionally that the trucks owned by the assessee
were given out on hire to outside parties and, hence, the assessee was not in
the business running the trucks on hire and, therefore, the assessee was not
entitled to claim higher rate of depreciation at 40%. This finding of the
Assessing Officer was reversed by the Commissioner of Income-tax (Appeals). It
was held by the Commissioner of Income-tax (Appeals) that the transportation
income of 12,50,639 by way of running the subject vehicles on hire was an
integral part of the assessee’s business and that its inclusion under the head
‘Business income’ was not disputed even by the Assessing Officer. This finding
of the Commissioner of Income-tax (Appeals) was affirmed by the Tribunal. The
High Court had refused to interfere on the ground that the matter involved
essentially questions of fact. On an appeal to the Supreme Court, it held that
generally, the Supreme Court does not interfere with the concurrent finding of
facts recorded by the authorities below. However, in this case, the Supreme
Court was of the opinion that a neat substantial question of law arose for
determination which needed interpretation of the depreciation table given in
Appendix I to the Income-tax Rules, 1962.

The Supreme Court held that under item (2)(ii) of
heading III, higher rate of depreciation is admissible on motor trucks used in
a business of running them on hire. Therefore, the user of the same in the
business of the assessee of transportation is the test.

According to the Supreme Court, in the present
case, none of the authorities below (except the Assessing Officer) had
examined the matter by applying the above test. The Assessing Officer had
given his finding that the assessee was not in the business of transportation
as he was only in the business of trading in timber logs. That, the burden was
on the assessee to establish that it is the owner of motor lorries and that it
used the said motor lorries/trucks in the business of running them on hire.

In the view of the Supreme Court, the entire
approach of the Commissioner of Income-tax (Appeals) was erroneous when he had
stated that the transportation income of Rs.12,50,639 by way of running the
subject vehicles on hire was an integral part of the appellant’s business and
its inclusion in the head ‘Business income’ is not disputed even by the AO.
According to the Supreme Court, mere inclusion of Rs.12,50,639 in the total
business income is not the determinative factor for deciding whether trucks
were used by the assessee during the relevant year in a business of running
them on hire. The Supreme Court therefore set aside the judgment of the High
Court and remitted the matter to the Commissioner of Income-tax (Appeals) for
de novo examination of the case in accordance with law.

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Business Expenditure — S. 42(1) — Special provisions for prospecting for mineral oil — Production sharing contract accounts is an independent accounting regime — Foreign exchange losses on account of foreign currency transaction is allowable as a deductio

New Page 14 Business Expenditure — S. 42(1) — Special
provisions for prospecting for mineral oil — Production sharing contract
accounts is an independent accounting regime — Foreign exchange losses on
account of foreign currency transaction is allowable as a deduction.

[CIT v. Enron Oil and Gas India Ltd.,
(2008) 305 ITR 75 (SC)]

The respondent-Enron Oil and Gas India Ltd. (‘the
EOGIL’), a company incorporated in Cayman Islands was engaged in the business
of oil exploration. In 1993, the Government of India through the Petroleum
Ministry invited bids for development of concessional blocks. EOGIL offered
its bid for the development of concessional blocks. A consortium of EOGIL with
RIL was given the contract. Later on, ONGC joined. EOGIL with RIL and ONGC
executed a production sharing contract (PSC) with the Government of India.
EOGIL was entitled to a participating interest of 30% in the rights and
obligations arising under the PSC. RIL was also entitled to participating
interest of 30%. ONGC was entitled to a participating interest of 40%. EOGIL
was designated as the operator under the said PSC.

Vide Notification No. 1997, dated March 8, 1996,
u/s.293A of the Income-tax Act, 1961 (‘the 1961 Act’), each co-venturer was
liable to be assessed for his own share of income. They were not to be treated
as an association of persons.

EOGIL filed its return of income for the
assessment year 1999-2000 declaring its taxable income of Rs. 71,19,50,013
u/s.115JA.

During the year, EOGIL debited its profit and
loss account by exchange loss of Rs.38,63,38,980. The Assessing Officer
disallowed this loss on the ground that it was a mere book entry and actually
no loss stood incurred by the assessee.

The decision of the Assessing Officer was
challenged in appeal by EOGIL before the Commissioner of Income-tax (Appeals),
who after analysing PSC held that each co-venturer in this case had made
contribution at a certain rate, whereas the expenditure incurred out of the
said contribution stood converted on the basis of the previous month’s average
daily means for the buying and selling rates of exchange which exercise
resulted in loss/profit on conversion. Under the circumstances, according to
the Commissioner of Income-tax (Appeals), it could not be said that the
assessee had incurred notional loss. In fact, during the course of
proceedings, the Commissioner of Income-tax (Appeals) found that during the
A.Ys. 1995-96 and 1996-97 the assessee had earned profits which stood taxed by
the Department. He further found that one co-venturer (ONGC) had gained
Rs.293.73 crores during the A.Y. 1997-98 because the Indian rupee had
appreciated as compared to foreign currency and the Department had taxed the
same, but when during the assessment year in question there is a loss on
account of such conversion, the Department has refused to allow the deduction
for such conversion losses. According to the Commissioner of Income-tax
(Appeals), the Department cannot blow hot and cold. Consequently, it was held
that just as the foreign exchange gain was taxable, loss was allowable
u/s.42(1) of the Income-tax Act in terms of the PSC. Therefore, the
Commissioner of Income-tax (Appeals) allowed as deduction, the loss of Rs.
38,63,38,980.

Aggrieved by the order passed by the Commissioner
of Income-tax (Appeals), the Department carried the matter in appeal to the
Income-tax Appellate Tribunal objecting to the deletion made by the
Commissioner of Income-tax (Appeals) on the ground that the loss was only a
book entry. Before the Tribunal the matter pertained to the A.Ys. 1999-2000,
199899, 2000-01 and 1996-97. However, for the sake of convenience, the
Tribunal focussed its attention on the facts and figures given for the A.Y.
1999-2000. Before the Tribunal, the Department contended that the assessee
borrows in USD and repays in the same currency for the preparation of the
balance sheet. The loans, according to the Department, were stated at
prevalent exchange rates and the loss arrived at was charged to the profit and
loss account. Therefore, according to the Department, the said loss was a book
entry and it was not an actual loss in foreign exchange caused to the assessee.
This argument of the Department was rejected by the Tribunal. It was held that
the assessee was a foreign company. It carried out business activity in India.
It had to maintain its accounts in rupees for the purpose of income-tax, that
the PSC had to be read with S. 42(1) of the Income-tax Act, which entitled the
assessee to claim conversion loss as deduction, particularly when the said PSC
provided for realised and unrealised gains/losses from the exchange currency.
According to the Tribunal, the assessee was maintaining its accounts in rupees
and such accounts had to reflect the loan liability under consideration as the
loan had been taken for the Indian activity. Therefore, according to the
Tribunal, the liability arising as a consequence of depreciation of the rupee
had to be considered both for accounting and tax purposes. Accordingly, the
Tribunal refused to interfere with the findings returned by the Commissioner
of Income-tax (Appeals).

The above concurrent finding stood confirmed by
the judgment delivered by the Uttarakhand High Court.

On further appeal, the Supreme Court observed
that the only question which needed consideration was whether the assessee was
entitled to claim deduction for foreign exchange losses on account of foreign
currency translation. In other words, whether loss arising on account of
foreign currency translation is allowable deduction or not and conversely
whether the gains on account of foreign currency translation is to be treated
as a receipt liable to tax. Analysing the provisions of S. 42(1), the Supreme
Court held that it was clear that the said Section was a special provision for
deductions in the case of business of prospecting, extraction/production of
mineral oils. S. 42(1) provides for admissibility in respect of three types of
allowances provided they are specified in the PSC. They relate to expenditure
incurred on account of abortive exploration, expenditure incurred before or
after the commencement of commercial production in respect of drilling or
exploration activities and expenses incurred in relation to depletion of
mineral oil in the mining area. If one reads S. 42(1) carefully, it becomes
clear that the above three allowances are admissible only if they are so
specified in the PSC.

Accordingly, the Supreme Court noted that the PSC
in question provided for both capital and revenue expenditures. It also
provided for a method in which the said expenses had to be accounted for. The
Supreme Court held that the said PSC was an independent accounting regime
which included tax treatment of costs, expenses, incomes, profits, etc. It
prescribed a separate rule of accounting. In normal accounting, in the case of fixed assets, generally when currency fluctuation results in an exchange loss, addition is made to the value of the asset for depreciation. However, under the PSC, instead of increasing the value of expenditure incurred on account of currency variation in the expenses itself, EOGIL was required to book losses separately. The said PSC prescribed a special manner of accounting which was at variance with the normal accountingstandards. The said ‘PSC accounting’ obliterated the difference between capital and revenue expenditure. It made all kinds of expenditure chargeable to the profit and loss account without reference to their capital or revenue nature. But for the PSC accounting there would have been disputes as to whetherthe expenses were of revenue or capital nature. In view of the special accounting procedure prescribed by the PSC, Accounting Standard 11 had to be ruled out.

The Supreme Court observed that Appendix C pre-scribed the manner in which a contractor is required to maintain his accounts. It stipulated that each of the co-venturers had to follow the computation of Income-tax under the 1961 Act. Clause 1.6.1. of appendix C referred to currency exchange rates. It stated that for translation purposes between USD and INR, the previous month’s average of the daily means of buying and selling rates of exchange as quoted by SBI shall be used for the month in which revenue, costs, expenditure, receipts or incomes are recorded. The Supreme Court therefore, held that clause 1.6.1 of appendix C provided for translation. The Supreme Court noted that subsequent to the award of the concession, EOGIL along with RIL and ONGC executed the PSC with the Government of India. Under the said PSC, each co-venturer remitted money, known as cash call to the bank account of the operator in the USA. The expenditure for the joint venture was made out of the said account. The trial balance was required to be prepared at the end of the month in USD, which was then required to be translated on the basis of accounting procedure mentioned in Appendix C to the PSC. The Supreme Court held that the cash call in other words was not a loan. Cash cali was a contribution. It was made by each co-venturer at a certain rate, whereas the expenditure against it had to be converted on the basis of the exchange rates as provided for in the PSC, which stated that the same had to be converted on the basis of the previous month’s average of the daily means of buying and selling rates of exchange. The above analysis showed that the capital contribution had to be converted under the PSC at one rate, whereas the expenditure had to be converted at a different rate. This exercise resulted in loss/ profit on conversion. Under the PSC, the respondent had to convert revenue, costs, receipts and incomes. If EOGIL had a choice to prepare its accounts only in USD, there would have been no loss/profit on account of currency translation. It is because of the specific provision in the PSC for currency translation that loss/profit accrued to EOGIL. The Supreme Court further held that in the PSC, the foreign company provides the capital investment and cost and the first proportion of oil extracted is generally allocated to the company which uses oil sales to recoup its costs and capital investment. The oil used for that purpose is termed ‘cost oil’. Often a company obtains profit not just from the ‘profit oil’, but also from the ‘cost oil’. Such profits cannot be ascertained without taking into account translation losses. Moreover, taxes are embedded in the profit oil. If these concepts are kept in mind, then it cannot be said that ‘translation losses’ under the PSC are illusory losses.

Appeal by the Revenue — Merely because in some cases the Revenue has not preferred appeal that does not operate as a bar for the Revenue to prefer an appeal in another case where there is a just cause.

New Page 12 Appeal by the Revenue — Merely because in
some cases the Revenue has not preferred appeal that does not operate as a bar
for the Revenue to prefer an appeal in another case where there is a just
cause.

[C. K. Gangadharan & Anr. v. CIT, (2008)
304 ITR 61 (SC)]

By order dated March 13, 2008, a reference was
made to a larger Bench of the Supreme Court and the order, of reference,
inter alia, read as follows :

”In view of the aforesaid position, we are of the
opinion that the matter requires consideration by a larger Bench to the extent
whether the Revenue can be precluded from defending itself by relying upon the
contrary decision.”

The Supreme Court made it clear that it was not
doubting the correctness of the view taken by it in the cases of Union of
India v. Kaumudini Narayan Dalal, (2001) 249 ITR 219, CIT v. Narendra
Doshi, (2002) 254 ITR 606 and CIT v. Shivsagar Estate, (2002) 257
ITR 59 to the effect that if the Revenue has not challenged the correctness of
the law laid down by the High Court and accepted it in the case of one
assessee, then it is not open to the Revenue to challenge its correctness in
the case of other assessees, without just cause. The Supreme Court after
noting its decisions in Bharat Sanchar Nigam Ltd. v. Union of India,
(2006) 282 ITR 273 (SC), State of Maharashtra v. Digambar, (1995) 4 SCC
683, Government of West Bengal v. Tarun K. Roy, (2004) 1 SCC 347,
State of Bihar Ramdeo Yadav, (1996) 3 SCC 493 and State of West Bengal
v. Devdas Kumar, (1991) Supp (1) SCC 138, observed that if the assessee
takes the stand that the Revenue acted mala fide in not preferring
appeal in one case and filing the appeal in other case, it has to establish
mala fides. The Supreme Court accepted the contention of the learned
counsel for the Revenue that there may be certain cases where because of the
small amount of revenue involved, no appeal is filed or where policy decisions
have been taken not to prefer appeal where the revenue involved is below a
certain amount. Similarly, where the effect of the decision is revenue
neutral, there may not be any need for preferring the appeal. All these
provide the foundation for making a departure.

The Supreme Court held that merely because in
some cases the Revenue has not preferred appeal that does not operate as a bar
for the Revenue to prefer an appeal in another case where there is just cause
for doing so or it is in public interest to do so or for a pronouncement by
the higher court when divergent views are expressed by the Tribunals or the
High Courts.

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Exemption — Local Authority — Marketing Committee to provide facilities for marketing of agricultural produce in a locality is not a ‘local authority’ and there fore its income is not exempt u/s.10(20) (after amendment by Finance Act, 2002). Its income is

New Page 13 Exemption — Local Authority — Marketing
Committee to provide facilities for marketing of agricultural produce in a
locality is not a ‘local authority’ and there fore its income is not exempt
u/s.10(20) (after amendment by Finance Act, 2002). Its income is exempt
u/s.10(26AAB) from 1-4-2009.

[Agricultural Produce Market Committee,
Narela v. CIT & Anr., (2008) 305 ITR 1 (SC)]

The appellant-Committee was established under
the Delhi Agricultural Produce Marketing (Regulation) Act, 1998 (the 1998
Act). The provisions of the said 1998 Act enjoined upon the appellant to
provide facilities for marketing of agricultural produce in Narela, Delhi.
This is apart from performing other functions and duties such as
superintendence, direction and control of markets for regulating the
marketing of agricultural produce.

For the A.Y. 2003-04, the appellant-Committee
claimed exemption from payment of tax on the income earned by it, on the
ground that it was a ‘local authority’ within the meaning of S. 10(20) of
the Income-tax Act, 1961 (the 1961 Act). It relied upon the definition of
‘local authority’ in S. 2(1)(l) of the said 1998 Act. The Assessing Officer
rejected the appellant’s claim for exemption relying upon Circular No.
8/2002, dated August 27, 2002 issued by the Central Board of Direct Taxes.
The view taken was that the amended provisions of S. 10(20) of the 1961 Act
were not attracted to ‘Agricultural Produce Marketing Societies’ or
‘Agricultural Market Boards’ even when they may be local authorities under
the Central or State legislation.

Aggrieved by the said order, the appellant
filed an appeal before the Commissioner of Income-tax (Appeals) who upheld
the view taken by the Assessing Officer and declined the exemption claimed
by the appellant.

A further appeal by the appellant, before the
Tribunal, also failed.

Aggrieved by the decision of the Tribunal, the
appellant moved the High Court by way of an appeal u/s.260A of the 1961 Act.
The Delhi High Court following its earlier judgment in the case of
Agricultural Produce Market Committee, Azadpur v. CIT, (ITA No.
749/2006), dismissed the appellant’s appeal.

On further appeal, the Supreme Court noted that
prior to the Finance Act, 2002, the said 1961 Act did not contain the
definition of the words ‘local authority’. Those words came to be defined
for the first time by the Finance Act, 2002, vide the Explanation/
definition clause.

After hearing the parties, the Supreme Court
observed that u/s.3(31) of the General Clauses Act, 1897, ‘local authority’
was defined to mean “a municipal committee, district board, body of port
commissioners or other authority legally entitled to the control or
management of a municipal or local fund. The words ‘other authority’ in S.
3(31) of the 1897 Act have been omitted by Parliament in the
Explanation/definition clause inserted in S. 10(20) of the 1961 Act, vide
the Finance Act, 2002. Therefore, it was not correct to say that the entire
definition of the words ‘local authority’ was bodily lifted from S. 3(31) of
the 1897 Act and incorporated by Parliament, in the Explanation to S. 10(20)
of the 1961 Act. This deliberate omission was important. The Supreme Court
noted that various High Courts had taken the view prior to the Finance Act,
2002, that AMC(s) is a ‘local authority’. That was because there was no
definition of the words ‘local authority’ in the 1961 Act. Those judgments
proceeded primarily on the functional tests as laid down in the judgment of
the Supreme Court in the case of R. C. Jain [(1981) 2 SCC 308].

In the case of R. C. Jain, the test of ‘like
nature’ was adopted as the words ‘other authority’ came after the words
‘Municipal Committee, District Board, Body of Port Commissioners’.
Therefore, the words ‘other authority’ in S. 3(31) took colour from the
earlier words, namely, ‘Municipal Committee, District Board or Body of Port
Commissioners’. This is how the functional test was evolved in the case of

R. C. Jain. The Supreme Court held that
Parliament in its legislative wisdom had omitted the words ‘other authority’
from the said Explanation to S. 10(20) of the 1961 Act. The said Explanation
to S. 10(20) provides a definition to the words ‘local authority’. It is an
exhaustive definition. It is not an inclusive definition. The words ‘other
authority’ do not find place in the said Explanation. Even according to the
appellant(s), AMC(s) was neither a Municipal Committee nor a District Board
nor a Municipal Committee nor a Panchayat. Therefore, according to the
Supreme Court, the functional test and the test of incorporation as laid
down in the case of R. C. Jain, was no more applicable to the Explanation to
S. 10(20) of the 1961 Act.

However, the Supreme Court felt that the
question still remained as to why Parliament had used the words ‘Municipal
Committee’ and ‘District Board’ in item (iii) of the said Explanation.
According to the Supreme Court, Parliament defined ‘local authority’ to mean
— a panchayat as referred to in clause (d) of Article 243 of the
Constitution of India, Municipality as referred to in clause (e) of Article
243P of the Constitution of India. However, there was no reference to
Article 243 after the words ‘Municipal Committee’ and ‘District Board’. It
appeared that the Municipal Committee and District Board in the said
Explanation were used out of abundant caution. In 1897 when the General
Clauses Act was enacted there existed in India, Municipal Committees and
District Boards and it was quite possible that in some remote place a
District Board still existed. The Supreme Court in conclusion observed that
having taken the view that AMC(s) is neither a Municipal Committee nor a
District Board under the Explanation to S. 10(20) of the Act, it refrained
from going into the question : whether the AMC(s) is legally entitled to the
control of the local fund, namely, Market Fund, under said 1998 Act, because
vide the Finance Act, 2008, income of AMC(s) is exempted under sub-section
(26AAB) of S. 10 with effect from April 1, 2009.

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Capital or revenue expenditure — Development and prospecting expenditure — The question is to be considered in the light of the provisions of S. 35E(2) and not in the context of S. 37(1).

New Page 1



  1. Capital or revenue
    expenditure — Development and prospecting expenditure — The question is to
    be considered in the light of the provisions of S. 35E(2) and not in the
    context of S. 37(1).

[Rajasthan State Mines
and Minerals Ltd. v. CIT, (2009) 313 ITR 366 (SC)

In the assessment orders
passed for the A.Ys. 1998-99 and 1999-2000 in the case of the assessee, a
public sector undertaking of the Government of Rajasthan, the Assessing
Officer disallowed the expenditure towards developments and prospecting
charges treating it as capital in nature. The Commissioner of Income-tax
(Appeals) referred to the provisions of S. 35E(2) which provide that any
expenditure incurred wholly and exclusively on any operation relating to
prospecting for any mineral or on development of a mine in the year of
commercial production and any one or more of the four years immediately
preceding that year shall be allowed as deduction equal to one tenth of the
amount of expenditure starting from the year the assessee is specifically
covered u/s.35E(2). The Commissioner of Income-tax (Appeals) observed that
the assessee had claimed write off over a period of time and therefore the
claim should be more. It appears that Commissioner of Income-tax (Appeals)
had upheld the disallowance for the reason that prospecting expenses were
incurred on expenditure of corporate plan which did not pertain to
prospecting expenses. Before the Tribunal it was contended by the assessee
that this expenditure was incurred for orientation of the administrative set
up and this was revenue in nature, whereas, the Departmental Representative
had contended that this expenditure was of capital nature because corporate
plan expenditure was of enduring benefit to the assessee company. It appears
that Tribunal rejected the assessee’s appeal. On a further appeal, the High
Court, also appears to have rejected the appeal of the assessee with
reference to the provisions of S. 37(1) of the Act. The Supreme Court, on
assessee’s appeal, observed that it could not be disputed that, had the High
Court considered the claim of the appellant in the light of S. 35E(2), it
might have arrived at a different conclusion. The Supreme Court, therefore,
set aside the judgment of the High Court and remitted the matter back to the
High Court for considering the assessee’s appeal afresh on merits.



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Salary : S. 14, S. 15, S. 16 and S. 17 of Income-tax Act, 1961 and Article 164(5) of Constitution of India : A.Y. 1996-97 : Chief Minister of a State : Pay and allowances received is assessable under the head ‘salary’.

New Page 1

  1. Salary : S. 14, S. 15, S. 16 and S. 17 of Income-tax Act,
    1961 and Article 164(5) of Constitution of India : A.Y. 1996-97 : Chief
    Minister of a State : Pay and allowances received is assessable under the head
    ‘salary’.

[Lalu Prasad v. CIT, 316 ITR 186 (Patna)]

For the A.Y. 1996-97, the assessee was the Chief Mininster
of Bihar and he filed his return of income wherein the pay and allowances
received by him as the Chief Minister was shown under the head ‘Income from
other sources’. The Assessing Officer assessed the amount under the head
‘Salary’. The Assessing Officer allowed the standard deduction of Rs.15,000
and disallowed the claim for deduction of the incidental expenditure. The
Tribunal confirmed the assessment order.

On appeal by the assessee the Patna High Court upheld the
decision of the Tribunal and held as under :

“Article 164(5) of the Constitution of India expressly
provided for payment of salary to the Chief Minister. The assessee in his
return had himself stated that he was the Chief Minister of the State and
received salary from the Government of Bihar. The Assessing Officer had not
erred in changing the head of income to ‘Salary’.”

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Depreciation : Additional depreciation : S. 32(1)(iia) of Income-tax Act, 1961 : Increase in installed capacity of final product is not a requirement for claiming additional depreciation.

New Page 5

  1. Depreciation : Additional depreciation : S. 32(1)(iia) of
    Income-tax Act, 1961 : Increase in installed capacity of final product is not
    a requirement for claiming additional depreciation.


[CIT v. Hindustan Newsprint Ltd., 183 Taxman 257 (Ker.)]

The assessee was engaged in manufacture and sale of
newsprint. It claimed additional depreciation in respect of de-inking plant in
which pulp was made from waste paper. The Assessing Officer disallowed the
claim on the ground that the installed capacity of final product of the
company, viz., newsprint remained unaltered even after installation of
de-inking machinery. The Tribunal held that there was increase in installed
capacity of pulp and pulp though, an intermediary product is also marketable
and, hence, the assessee was entitled to additional depreciation u/s.32(1)(iia).

On appeal by the Revenue the Kerala High Court upheld the
decision of the Tribunal and held as under :

“(i) The provision of S. 32(1)(iia) was modified
dispensing with the requirement of increase in installed capacity as a
condition for eligibility for additional depreciation.

(ii) The fact that pulp is an intermediary product and is
generally consumed captively in the manufacture of newsprint does not mean
that pulp is not a product that can not be marketed by the assessee as and
when it desired. There is no dispute that pulp is a marketable commodity. If
there was reduction in the manufacture of the final product on account of
any reason, necessarily the assessee would have to market the excess pulp
produced.

(iii) The view of the Tribunal that pulp being marketable
commodity produced by the assessee, the increase of the installed capacity
of the pulp plant on account of the installation of de-inking machinery
would entitle the assessee to the benefit of additional depreciation was to
be accepted. The finding of the Tribunal that there has been increase in the
installed capacity of the production of pulp in terms of the requirement of
the provision in the statute was not disputed by the revenue.

(iv) On the other hand its contention was that the
installed capacity of an industry should always be understood with reference
to final product manufactured and sold by it, which was newsprint in the
instant case; that contention of the revenue could not be accepted.

(v) The intermediary product, viz., pulp produced
by the company being a marketable commodity, the increase in the installed
capacity for claiming benefit of additional depreciation under the above
provision could be in the production of intermediary, viz., pulp.
Therefore, the finding of the Tribunal was to be accepted.”

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Depreciation : User of asset : Assessee in leasing business : Lease of machinery in accounting year : Lessee installing machinery in subsequent year : Not relevant : Assessee entitled to depreciation.

New Page 5

  1. Depreciation : User of asset : Assessee in leasing
    business : Lease of machinery in accounting year : Lessee installing machinery
    in subsequent year : Not relevant : Assessee entitled to depreciation.

[CIT v. Kotak Mahindra Finance Ltd., 317 ITR 236 (Bom.)]

The assessee was in the business of leasing. In the
relevant accounting year the assessee had leased out breakers to TECL. The
lessee installed the breakers in the subsequent year. The Assessing Officer
disallowed the claim for depreciation on the ground that asset was not put to
use in the relevant year. The Tribunal allowed the assessee’e claim.

On appeal by the Revenue, the Bombay High Court upheld the
decision of the Tribunal and held as under :

“(i) The assessee, admittedly had supplied the machinery
before the end of the financial year and the assessee had received the lease
rental for the same. Whether the lessee had put to use the lease equipment
would be irrelevant as long as the machinery in fact had been given on lease
before the end of the financial year, as then it could be said that the
assessee for the purposes of business had ‘used’ the leased equipment.

(ii) The assessee was entitled to depreciation.”

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Business expenditure : S. 37 of Income-tax Act, 1961 : A.Y. 2004-05 : Assessee civil contractor : Constructed Hockey Stadium in the Collectorate Complex for securing DRDA contract : Expenditure on stadium is business expenditure allowable u/s.37.

New Page 1

  1. Business expenditure : S. 37 of Income-tax Act, 1961 : A.Y.
    2004-05 : Assessee civil contractor : Constructed Hockey Stadium in the
    Collectorate Complex for securing DRDA contract : Expenditure on stadium is
    business expenditure allowable u/s.37.

[CIT v. Velumanickam Lodge, 317 ITR 338 (Mad.)]

The assessee, a civil contractor, wrote a letter to the
District Collector to secure the DRDA contract from the office of the District
Collectorate, expressing its willingness to construct a hockey stadium in the
Collectorate Complex and after receipt of the letter the DRDA contract was
awarded by the Collector to the assessee. In the previous year relevant to A.Y.
2004-05 the assessee constructed the hockey stadium and the expenditure on the
construction of the hockey stadium of Rs.24 lakhs was claimed as revenue
expenditure. The Assessing Officer disallowed the claim treating the
expenditure as capital expenditure. The Tribunal allowed the assessee’s claim
holding that the assessee volunteered to construct the hockey stadium for
generating goodwill and for promoting its business activities, especially
where such construction of the hockey stadium was for the welfare of the
public, which was not prohibited by law. The Tribunal observed that the mere
willingness expressed by the assessee to construct the hockey stadium in the
District Collectorate Complex for a value of Rs.24 lakhs could not be
construed as bribe to a person or as contribution for a private fund or for
the benefit of any individual which could be regarded as a form of illegal
gratification.

On appeal by the Revenue, the Madras High Court upheld the
decision of the Tribunal and held as under :

“The construction of the hockey stadium by the assessee
was in the regular course of business apart from the fact that such
construction came to be made on property belonging to the District
Collectorate meant solely for the use of public at large. Thus, the
investment made by the assessee for construction of the hockey stadium was
in the regular course of business and such investment could be construed as
one made with a view to enlarge its scope of business and could be termed as
business expenditure.”

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Assessment : Cross-examination of witnesses : A.Y. 1996-97 : Assessment based on statement of witnesses : No opportunity afforded to assessee to cross-examine the witnesses : Matter remanded.

New Page 2

  1. Assessment : Cross-examination of witnesses : A.Y. 1996-97 : Assessment based on statement of witnesses : No opportunity afforded to assessee to cross-examine the witnesses : Matter remanded.

[CIT v. Land Development Corporation, 316 ITR 328 (Karn.)]

The assessee was carrying on the business of real estate and building apartments. For the A.Y. 1996-97, the assessee had claimed depreciation on certain machineries used for the purposes of the business. In the course of survey conducted at the premises of the assessee and the seller of the machinery, statements of different persons were recorded. On the basis of such statements the claim for depreciation was disallowed. The assessee contended that the witnesses whose statements have been relied on were not allowed to be cross-examined by the assessee and therefore the disallowance can not be sustained in law. The Tribunal accepted the contention.

On appeal by the Revenue the Karnataka High Court held as under :

“The matter was to be remanded to the Assessing Officer for affording an adequate and proper opportunity to the assessee for cross-examination of all the witnesses whose statements were recorded earlier and whose statements had been already supplied to the assessee.”

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Assessment : A.Ys. 1993-94 to 1995-96 : Business expenditure : Disallowance : Not to be based only on admissions of assessee : Admission not conclusive evidence.

New Page 1

  1. Assessment : A.Ys. 1993-94 to 1995-96 : Business
    expenditure : Disallowance : Not to be based only on admissions of assessee :
    Admission not conclusive evidence.

[Ester Industries Ltd. v. CIT, 316 ITR 260 (Del.)]

For the A.Ys. 1993-94 to 1995-96, the disallowances made by
the Assessing Officer were reversed by the CIT(A) and the additions were
deleted on the ground that the assessment order did not justify the additions.
The Tribunal reversed the order of the CIT(A) and restored the order of the
Assessing Officer on the ground that the assessee both in its original as well
as in its revised return had made admissions which formed the basis of the
additions made by the Assessing Officer.

On appeal, the assessee contended that had the assessee
been given an opportunity by the AO, it could have demonstrated that no
additions or disallowances were called for. The Delhi High Court allowed the
appeal and held as under :

“(i) The Tribunal ought to have examined the issue as to
whether the fact that the assessee had made an admission with respect to an
addition in its original return or in the revised return would ipso facto
bar the assessee from claiming an expense or disputing an addition, if it is
otherwise permissible under law.

(ii) The Assessing Officer did not call upon the assessee
to furnish any explanation at the time of making additions. The Tribunal
should have examined the matter based on the point that an admission is an
extremely important piece of evidence but it could not be said to be
conclusive. It was open to the person who made the admission to show that it
was incorrect.

(iii) The Tribunal’s order was to be set aside and it was
directed to rehear the parties.”

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Appeal : Right of payer to appeal : S. 246(1)(i) and S. 248 of Income-tax Act, 1961 : A.Y. 1997-98 : Even if tax is not effected by the payer, the payer has every right to question the tax liability of the payee to avoid vicarious consequences : Payer is

New Page 1

  1. Appeal : Right of payer to appeal : S. 246(1)(i) and S. 248
    of Income-tax Act, 1961 : A.Y. 1997-98 : Even if tax is not effected by the
    payer, the payer has every right to question the tax liability of the payee to
    avoid vicarious consequences : Payer is entitled to prefer appeal.

[Jindal Thermal Power Company Ltd. v. Dy. CIT, 225
CTR 220 (Karn.)]

In this case the appellant had made payment for which it
had not deducted tax at source. It preferred appeal disputing the tax
liability of the payee in respect of such payment. Dealing with the question
of the locus standi of the appellant to file appeals the Karnataka High Court
held as under :

“The decision (relied on by the Revenue) does not lay
down that the person who is obliged to effect TDS u/s.195 has no right to
question the assessment of tax liability. Since in law, if TDS is not
effected by the payer (Jindal), the payer would be ultimately responsible to
pay the tax liability of the payee. The conjoint reading of S. 195, S. 201
r.w. S. 246(1)(i) and S. 248 makes it clear that Jindal as a payer has every
right to question the tax liability of its payee to avoid the vicarious
consequences. Therefore, the contention that Jundal has no right of appeal
is to be rejected.”

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Arm’s length price : Determination : S. 92CA of Income-tax Act, 1961 : Amendment w.e.f. 1-6-2007 : Transfer Pricing Officer must give an opportunity of hearing : Assessee must be given opportunity to inspect material available with Transfer Pricing Office

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  1. Arm’s length price : Determination : S. 92CA of Income-tax
    Act, 1961 : Amendment w.e.f. 1-6-2007 : Transfer Pricing Officer must give an
    opportunity of hearing : Assessee must be given opportunity to inspect
    material available with Transfer Pricing Officer and file further material.

[Moser Baer India Ltd. v. Addl. CIT, 316 ITR 1
(Del.)]

In this case the petitioners challenged the orders of the
Transfer Pricing Officer(TPO) on the following grounds :

(a) The TPO has not granted an oral hearing before
determining the arm’s length price in respect of international transactions
entered into by the petitioners with their associated enterprises; and

(b) There has been failure on the part of the TPO to
consider documents and information filed by the petitioners, as also,
non-disclosure of information and documents obtained by the TPO which were
used by him in the determination of the arm’s length price.

The Delhi High Court allowed the petitions and held as
under :

“(i) S. 92CA was inserted w.e.f. 1-6-2002 and was amended
w.e.f. 1-6-2007. Prior to the amendment, the Assessing Officer on receipt of
an order passed by the TPO under Ss.(3) of S. 92CA, would proceed to compute
the total income of the assessee u/s.92C(4) having regard to the arm’s
length price determined by the TPO. After the amendment, the Assessing
Officer is required to compute the total income of the assessee u/s.92C(4)
in conformity with the arm’s length price determined by the TPO. Thus, prior
to the amendment, the Assessing Officer while computing the total income of
the assessee, having regard to the arm’s length price so determined by the
TPO, was required to give the final opportunity to the assessee before
computing the assessee’s total income. This is clear from the language used
in Ss.(4) of S. 92CA prior to its amendment, as the determination by the TPO
was not binding on the Assessing Officer. The Assessing Officer was thus
empowered even at the stage of computation of total income to look into the
issues pertaining to the determination of the arm’s length price by the TPO.

(ii) Authorities which have power to decide and whose
decisions would prejudice a party, entailing civil consequences, would be
required to accord oral hearing even where a statute is silent. The
provisions of Ss.(3) of S. 92CA cast an obligation on the TPO to afford a
personal hearing to the assessee before he proceeds to pass an order of
determining of the arm’s length price in terms of S. 92CA(3).

(iii) Since such a requirement flows from a plain reading
of the provisions of S. 92CA(3), the determination of the arm’s length price
by the TPO could not be sustained by recourse of the fact that the assessee
did not demand an oral hearing.

(iv) To obviate any difficulty in future the show-cause
notice issued by the TPO just prior to the determination of the arm’s length
price u/s. 92CA(3) should refer to the documents available with the
Assessing Officer in relation to the international transaction in issue. The
show-cause notice should also give an option to the assessee: (a) both, to
inspect the material available with the Assessing Officer as also the leeway
to file further material or evidence if he so desires, and (b) to seek a
personal hearing in the matter.”

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Full adoption of Accounting Standard 30 Strides Arcolab Ltd. (31-12-2008)

From Accounting Policies

Financial Assets, Financial Liabilities, Financial Instruments, Derivatives and Hedge Accounting

1. The Company classifies its financial assets into the following categories: financial instruments at fair value through profit and loss, loans and receivables, held to maturity investments and available for sale financial assets. Financial assets of the Company mainly include cash and bank balances, sundry debtors, loans and advances and derivative financial instruments with a positive fair value.

Financial liabilities of the Company mainly comprise secured and unsecured loans, sundry creditors, accrued expenses and derivative financial instruments with a negative fair value. Financial assets/liabilities are recognised on the balance sheet when the Company becomes a party to the contractual provisions of the instrument. Financial assets are derecognised when all of risks and rewards of the ownership have been transferred. The transfer of risks and rewards is evaluated by comparing the exposure, before and after the transfer, with the variability in the amounts and timing of the net cash flows of the transferred assets.

Available for sale financial assets (not covered under other Accounting Standards) are carried at fair value, with changes in fair value being recognised in Equity, unless they are designated in a Fair value hedge relationship, where such changes are recognised in the Profit and Loss account.

Loans and receivables, considered not to be in the nature of Short-term receivables, are discounted to their present value. Short-term receivables with no stated interest rates are measured at original invoice amount, if the effect of discounting is immaterial. Non-interest bearing deposits, meeting the criteria of financial asset, are discounted to their present value.

Financial liabilities held for trading and liabilities designated at fair value, are carried at fair value through profit and loss. Other financial liabilities are carried at amortised cost using the effective interest method. The Company measures the short-term payables with no stated rate of interest at original invoice amount, if the effect of discounting is immaterial.

Financial liabilities are derecognised when extinguished.

2. Determining fair value

Where the classification of a financial instrument requires it to be stated at fair value, fair value is determined with reference to a quoted market price for that instrument or by using a valuation model. Where the fair value is calculated using financial markets pricing models, the methodology is to calculate the expected cash flows under the terms of each specific contract and then discount these values back to a present value.


3. Derivative financial instruments

The Company is exposed to foreign currency fluctuations on foreign currency assets and liabilities. The Company limits the effects of foreign exchange rate fluctuations by following established risk management policies including the use of derivatives. The Company enters into forward exchange financial instruments where the counterparty is a bank. Changes in fair values of these financial instruments that do not qualify as a Cash flow hedge accounting are adjusted in the Profit and Loss.

4. Hedge Accounting

Some financial instruments and derivatives are used to hedge interest rate, exchange rate, commodity and equity exposures and exposures to certain indices. Where derivatives are held for risk management purposes and when transactions meet the criteria specified in Accounting Standard 30, the Company applies fair value hedge accounting or cash flow hedge accounting as appropriate to the risks being hedged.


5. Fair value hedge accounting

Changes in the fair value of financial instruments and derivatives that qualify for and are designated as fair value hedges are recorded in the Profit and Loss Account, together with changes in the fair value attributable to the risk being hedged in the hedged assets or liability. If the hedged relationship no longer meets the criteria for hedge accounting, it is discontinued.

From Notes to Accounts

6. Adoption of Accounting Standard-30 : Financial Instruments : Recognition and Measurement, issued by Institute of Chartered Accountants of India

Arising from the Announcement of the Institute of Chartered Accountants of India (ICAI) on March 29, 2008, the Company has chosen to early adopt Accounting Standard (AS) 30 :

‘Financial Instruments : Recognition and Measurement’. Coterminous with this, in the spirit of complete adoption, the Company has also implemented the consequential limited revisions in view of AS 30 to AS 2, ‘Valuation of Inventories’, AS 11’ The Effect of Changes in Foreign Exchange Rates’, AS 21 ‘Consolidated Financial Statements and Accounting for Investments in Subsidiaries in Separate Financial Statements’, AS 23 ‘Accounting for Investments in Associates in Consolidated Financial Statements’, AS 26 ‘Intangible Assets’, AS 27 ‘Financial Reporting of Interests in Joint Ventures’, AS 28 ‘Impairment of Assets’ and AS 29 ‘Provisions, Contingent Liabilities and Contingent Assets’ as have been announced by the ICAI.

Consequent to adoption of AS 30 and the transitional provision under the standard :

The Company has changed the designation and measurement principles for all its significant financial assets and liabilities existing as at January 1, 2008. The impact on account of the above measurement of these is as described below :

6.1 Foreign Currency Convertible Bonds (FCCBs or Bonds)

On adoption of AS 30, the FCCBs are split into two components comprising (a) option component which represents the value of the option in the hands of the FCCB-holders to convert the bonds into equity shares of the Company and (b) debt component which represents the debt to be redeemed in the absence of conversion option being exercised by FCCB-holder, net of issuance costs. The debt component is recognised and measured at amortised cost while the fair value of the option component is determined using a valuation model with the below mentioned assumptions.

Assumptions used to determine fair value of the options:

Valuation and amortisation method – The Company estimates the fair value of stock options granted using the Black Scholes Merton Model and the principles of the Roll-Geske-Whaley extension to the Black Scholes Merton model. The Black Scholes Merton model along with the extensions above requires the following inputs for valuation of options:

Stock Price as at the date of valuation – The Company’s share prices as quoted in the National Stock Exchange Limited (NSE), India have been converted into equivalent share prices in US Dollar terms by applying currency rates as at valuationates. Further, stock prices have been reduced by continuously compounded stream of dividends expected over time to expiry as per the principles of the Black-Scholes Merton model with Roll Geske Whaley extensions.

Strike price for the option – has been computed in dollar terms by computing the redemption amount in US dollars on the date of redemption (if not converted into equity shares) divided by the number of shares which shall be allotted against such FCCBs.

Expected Term – The expected term represents time to expiry, determined as number of days between the date of valuation of the option and the date of redemption.

Expected Volatility – Management establishes volatility of the stock by computing standard deviation of the simple exponential daily returns on the stock. Stock prices for this purpose have been

6.1 Foreign Currency  Convertible Bonds (FCCBs or computed by expressing daily closing prices as Bonds) quoted  on the NSE into equivalent  US dollar terms. For the purpose  of computing  volatility  of stock prices, daily prices for the last one year have been considered as on the respective valuation dates.

Risk-Free Interest Rate – The risk-free interest rate used in the Black-Scholes valuation method is assumed at 7%.

Expected Dividend – Dividends have been assumed to continue, for each valuation rate, at the rate at which dividends were earned by shareholders in the last preceding twelve months before the date of valuation.

Measurement of Amortised cost of debt component:

For the purpose of recognition and measurement of the debt component, the effective yield has been computed considering the amount of the debt component on initial recognition, origination costs of the FCCB and the redemption amount if not converted into Equity Shares. To the extent the effective yield pertains to redemption premium and the origination costs, the effective yield has been amortised to the Securities Premium Account as permitted under section 78 of the Companies Act, 1956. The balance of the effective yield is charged to the Profit and Loss Account.


Consequent to change in policy for accounting of FCCBs,

a) Rs.934.71 Million being the previously accrued Debenture Redemption Reserve out of the Securities Premium Account has been credited back to Securities Premium Account.

b) Rs.124.68 Million being the amount of FCCB issue expenses previously debited to Securities Premium Account has been reversed.

c) Rs.443.20 Million and Rs.546.41 Million has been debited to Securities Premium Account as at December 31, 2007 and during the year 2008, respectively towards the amortised interest attributable to the effective yield pertaining to the redemption premium and FCCB issue expenses.

d) Rs.202 Million being the excess of amortised interest chargeable to Profit and Loss Account as per the policy adopted by the Company over the previously recognised interest cost upto December 31, 2007 has been debited to General Reserve Account.

e) Interest expense for the year debited to Profit and Loss Account is higher by Rs.216.48 Million, and Profit Before Tax for the year is lower by the corresponding amount.

f) The difference between the fair value of the option component on the date of issue of the FCCBs and December 31, 2007 amounting to Rs.427.10 Million has been credited to the General Reserve Account.

g) Rs.452.21 Million being the difference in the carrying amount of the option component between December 31, 2008 and December 31 2007 has been credited to the Profit and Loss Account of the year.

h) Rs.63.31 Million being the incremental exchange difference upto December 31, 2007 arising out of the accounting treatment of FCCBs described above has been debited to General Reserve Account. Exchange loss on restatement of FCCBs is lower and Profit Before Tax for the year is higher by Rs.101.54 Million.

6.2 Consequent to change in policies for accounting for External commercial borrowings (another financial liability), excess of amortised interest cost of Rs.0.53 Million and Rs.0.79 Million chargeable to Profit and Loss Account as per the policy adopted by the Company over the previously recognised interest cost for the period upto December 31, 2007 and for year ended December 31, 2008, respectively, has been debited to General Reserve Account and the Profit and Loss account respectively.

6.3 The financial assets and liabilities arising out of issue of corporate financial guarantees to third parties are accounted at fair values on initial recognition. Financial assets continue to be carried at fair values. Financial liabilities are subsequently measured at the higher of the amounts determined under AS 29 or the fair values on the measurement date. At December 31,2008, the fair values of such financial assets are equal to such liabilities and have been set off in the financial statements.

6.4 As required under the Companies Act, 1956, Redeemable Preference Shares are included as part of share capital and not as debt and dividend on the preference shares will be accounted as dividend as part of appropriation of profits and have not been accrued as interest cost. Further, due to inadequate profits, the Company has not accrued dividend of Rs. 29.50 Million each for the year ended December 31, 2007 and December 31, 2008, and the related Dividend distribution taxes.

6.5 Fully convertible debentures are considered as borrowings and are not disclosed as part of shareholder funds, and interest thereon of Rs.24.73 Million is debited to the Profit and Loss Account as interest cost as required under the Companies Act, 1956 and has not been treated as dividend.


Hedge  Accounting:

The Company had prior to December 31, 2007 designated its investments in Starsmore Limited, Cyprus, Strides Africa Limited, British Virgin islands and Akorn Strides LLC, USA, whose functional currency is US dollars as hedged items in a fair value hedge and to the extent of the hedge items, designated FCCB’s availed in US dollars as hedging instruments, to hedge the risk arising from fluctuations in the foreign exchange rate between the Indian Rupee and the US dollar. The carrying values of the designa ted hedged iterns and the hedging instruments as at December 31, 2008 is USD 100.55 Million and USD 69.20 Million as at December 31, 2007.

Accordingly, applying the fair value hedge accounting principles, the exchange gains/ losses on the hedging instrument is recognised in Profit and Loss Account along with the associated exchange gains/losses on the restatement of the designated portion of the investments. The impact of exchange loss arising on restatement of designated portion of the USD investments as of December 31, 2007 amounted to Rs. 120.42 Million and has been debited to the General Reserve Account.

The exchange gains arising on restatement of designated portion of the USD investments for the year ended December 31, 2008 amounting to Rs. 923.40 Million has been treated as an effective fair value hedge since the loss arising on the dollar loans designated as hedging instruments amounted to a similar amount and such gains have been credited to the Profit and such gains have been credited to the Profit and Loss account for year ended December 31,2008.

Prior to the adoption of the AS 30 ‘Financial Instruments: Recognition and Measurement’, and the limited revisions to AS 21 ‘Consolidated Financial Statements and Accounting for Investments in Subsidiaries in Separate Financial Statements’, investments in subsidiaries were valued at cost less diminution in value that was other than temporary as per the provisions of AS-13 ‘Accounting for Investments’ that was notified under section 21l(3C) of the Companies Act, 1956. As a result of above change in accounting policy, carrying value of investments as at December 31, 2008 is higher by Rs. 802.98 Million, profit for the year is higher by Rs. 923.40 Million and General Reserve is higher by Rs. 802.98 Million.

6.7 The Company has availed Bill Discounting facility from Banks which do not meet the de-recognition criteria for transfer of contractual rights to receive cash flows from the Debtors since they are with recourse to the Company.

Accordingly, as at December 31, 2008, Sundry Debtor balances include such amounts and the corresponding financial liability to the Banks is included as part of short term secured loans.

6.8 All the open derivative positions as on January 1, 2008 not designated as hedging instruments have been classified as held for trading and gains/losses recognised in the Profit and Loss Account. The incremental negative fair value of such derivatives over and above provision carried was Rs. 100.92 Million as at December 31,2007 which has been debited to the General Reserve Account. Incremental negative fair value of the open derivatives position as at December 31, 2008 amounting to Rs. 346.08 Million has been debited to Profi t and Loss Account for the year.

From Notes  to Accounts (con’td.)

33. Disclosures relating to Financial instruments to the extent not disclosed elsewhere in Schedule P

Breakup of Allowance for Credit Losses is as under:


Details on Derivatives Instruments & Unhedged Foreign Currency Exposures

The following derivative positions are open as at December 31, 2008. While these transactions have been undertaken to act as economic hedges for the Company’s exposures to various risks in foreign exchange markets, they have not qualified as hedging instruments in the context of the rigour of such classification under Accounting Standard 30. Theses instruments are therefore classified as held for trading and gains/losses recognised in the Profit and Loss Account.

i. The Company had entered into the following derivative instruments:

a . Forward Exchange Contracts [being a derivative instrument), which are not intended for trading or speculative purposes, but for hedge purposes, to establish the amount of reporting currency required or available at the settlement date of certain payables and receivables.

The following are the outstanding Forward Exchange Contracts entered into by the Company as on December 31, 2008.

  1. b) Interest Rate Swaps to hedge against fluctuations in interest rate changes: No. of contracts: Nil (Previous year: No. of contracts: 3, Notional Principal: USD 20 Million).c) Currency Swaps (other than forward exchange contracts stated above) to hedge against fluctuations in change in exchange rate.of contracts: Nil (Previous Year: No of  contracts 6, Notional Principal: USD 80 Million).ii. The year end foreign currency exposures that have not been hedged by a derivative instrument or otherwise are given below:

iii. Derivative Instruments (causing an un-hedged foreign currency exposure) : Nil (Previous Year USD 8 Million – Sell)

iv. Losses on forward Exchange Derivate contracts (Net) included in the Profit and Loss account for year ended December 31, 2008 amount Rs.454.27 Million.

Categories of Financial Instruments

a) Loans and Receivables:

The following financial assets in the Balance Sheet have been classified as Loans and Receivables as defined in Accounting Standard 30. These are carried at amortised cost less impairment if any. The carrying amounts are as under:

In the opinion of the management, the carrying amounts above are reasonable approximations of fair values of the above financial assets.

b)  Financial Liabilities  Held at Amortised Cost

The following financial liabilities are held at amortised cost. The Carrying amount of Financial Liabilities is as under:

  1. c) Financial Liabilities  Held for Trading

The option component of Foreign Currency Convertible Bonds (FCCBs) has been classified as held for trading, being a derivative under Accounting Standard 30. Refer Note B.6 of Schedule P on FCCBs. The carrying amount of the option component was Rs.134.20 Million as at December 31,2008 and Rs.586.42 Million as at December 31, 2007. The difference in carrying value between the two dates, amounting to Rs.452.21 Million is taken as gain to the Profit and Loss Account of the year in accordance with provisions of Accounting Standard 30.

The fair value  of the  option  component  has been determined using a valuation model. Refer to Note B.6 above on FCCBs for detailed disclosure on the valuation method.

d) There are no financial assets in the following categories:

o Financial assets carried at fair value through profit and loss designated at such at initial recognition.

o Held  to maturity

o Available  for sale

o Financial liabilities carried at fair value through profit and loss designated as such at initial recognition.

Financial    assets pledged

The following financial assets have been pledged:

Financial Asset Carrying value Dec. 31, 2007 Carrying value Dec. 31, 2007 Liability/Contingent Liability for which

pledged as collateral

 Terms and conditions

relating to pledge
I. Margin Money with Banks
A. Margin Money for

Letter of Credit

 80.89 82.87 Letter of Credit The Margin Money is

interest bearing deposit

with Banks. These

deposits can be

withdrawn on the

maturity of all Open

Letters of Credit.
B. Margin   Money   for 26.31 6.29 Bank  Guarantee The Margin Money is
Bank  Guarantee interest bearing deposit
with Banks. These
Deposits are against
Performance Guarantees.
Theses  can be withdrawn
on the  satisfaction  of the
purpose for which the
Guarantee is provided.
C.  Other Margin  Money 11.82 Margin  Money The Margin Money is
as Guarantee   for interest bearing deposit
Loan  to with Banks. This Deposit
Subsidiary is against Guarantees for
Loan advanced to
Subsidiary. This deposit
has been withdrawn on
the repayment of the
Loan by the Subsidiary.
II.  Sundry debtors 974.61 651.61 Bills discounted The Bills discounted  with
Banks  are secured  by the
Receivable.

Nature and extent of risk arising from financial instruments

The  main    financial    risks faced by  the  Company relate to fluctuations in interest and foreign exchange rates, the risk of default by counterparties to financial transactions, and the availability of funds to meet business needs. The Balance Sheet as at December 31, 2008 is representative of the position through the year. Risk management is carried out by a central treasury department under the guidance of the Management.


Interest rate  risk

Interest rate risk arises from long term borrowings. Debt issued at variable rates exposes the company to cash flow risk. Debt issued at fixed rate exposes the company to fair value risk. In the opinion of the management, interest rate risk during the year under report was not substantial enough to require intervention or hedging through derivatives or other financial instruments. For the purposes of exposure to interest risk, the company considers its net debt position evaluated as the difference between financial assets and financial liabilities held at fixed rates and floating rates respectively as the measure of exposure of notional amounts to interest rate risk. This net debt position is quantified as under:

Particulars 2008 2007
Fixed
Financial Assets …………………. 301.02 ……… 745.74
Financial liabilities  ……….. (7,123.32) …. (7,665.91)
(6,822.30) …. (6,920.17)
Floating
Financial Assets …………………. 229.20 ……… 196.26
Financial liabilities  ……….. (3,717.10) …. (2,961.78)
(3,487.90) …. (2,769.52)

Credit risk

Credit risk arises from cash and cash equivalents, financial instruments and deposits with banks and financial institutions. Credit risk also arises from trade receivable and other financial assets.

The credit risk arising from receivable is subject to concentration risk in that the receivable are predominantly denominated in USD and any appreciation in the INR will affect the credit risk. Further, the Company is not significantly exposed to geographical distribution risk as the counter-parties operate across various countries across the Globe.

Liquidity risk
Liquidity risk is the risk that the Company will not be able to meet its financial obligations as they fall due. The Company’s approach to managing liquidity is to ensure, as far as possible, that it will always have sufficient liquidity to meet its liabilities when due, under both normal and stressed conditions, without incurring unacceptable losses or risking damage to Company’s reputation. liquidity risk is managed using short term and long term cash flow forecasts.

The following is an analysis of undiscounted contractual cash flows payable under financial liabilities and derivatives as at December 31, 2008 :

Financial

Liabilities

 Due within
1 year 1 and 2 and 3 and 4 and
2 years 3 years 4 years 5 years
Bank Borrowings 2,860.74 369.43 279.97 182.59 91.29
Interest  payable

on borrowings

 0.08 – – – –
Hire

Purchase  liabilities

 2.48 2.23 0.41 0.13 –
Other

Borrowings

 – 2,306.64 – 4,744.43 –
Trade

and

other

payables

not in

net debt

 1,985.95 – – – –
Fair Value

of Options

embedded

in FCCBs

 – 11.06 – 123.15 –
Fair value

of Forward

exchange

derivative  contracts

 174.12 165.61 – – –
Total 5,023.37 2,689.36 280.38 5,050.30 91.27

For the purposes of the above table, undiscounted cash flows have been applied. Undiscounted cash flows will differ from fair values. Foreign currency liabilities have been computed applying spot rates on the Balance Sheet date.

Foreign exchange risk
The Company is exposed to foreign exchange risk principally via:

o Debt availed in foreign currency

o Net investments in subsidiaries and joint ventures that are made in foreign currencies.

o Exposure arising from transactions relating to purchases, revenues, expenses etc to be settled in currencies other than Indian Rupees, the functional currency of the respective entities.

The Company had designated its investments in certain subsidiaries whose functional currency is US dollars as hedged items in a fair value hedge and certain loans availed in US dollars as hedging instruments to hedge the risk arising from fluctuations in the foreign exchange rate between the Indian Rupee and the US dollar. The carrying values of the financial liabilities designated as hedging instruments as at December 31, 2008 is Rs.4,897.97 Million.

The loss arising on the dollar loans designated as hedging instruments recognised in the Profit and Loss Account for the year ended December 31, 2008 is Rs.923.40 Million. The gain arising from investments in certain subsidiaries designated as hedged items as much as is attributable to the hedged foreign exchange risk recognised in the Profit and Loss Account for the year ended December 31, 2008 is Rs.923.40 Million.

Sensitivity analysis as at December 31, 2008

Financial instruments affected by interest rate changes include Secured Long term loans from banks, Secured Long term loans from others, Secured Short term loans from banks and Secured Short term loans from banks. The impact of a 1% change in interest rates on the profit of an annual period will be Rs.108.29 Million assuming the loans as of December 31, 2008 continue to be constant during the annual period. This computation does not involve a revaluation of the fair value of loans as a consequence of changes in interest rates. The computation also assumes that an increase in interest rates on floating rate liabilities will not necessarily involve an increase in interest rates on floating rate financial assets.

Financial instruments affected by changes in foreign exchange rates include FCCBs, External Commercial Borrowings (ECBs), investments in subsidiaries, loans in foreign currencies to erstwhile subsidiaries and loans to subsidiaries and joint ventures. The company considers US Dollar and the Euro to be principal currencies which require monitoring and risk mitigation. The Company is exposed to volatility in other currencies including the Great Britain Pounds (GBP) and the Australian Dollar (AUD).

For the purposes of the above table, it is assumed that the carrying value of the financial assets and liabilities as at the end of the respective financial years remains constant thereafter. The exchange rate considered for the sensitivity analysis is the Exchange Rate prevalent as a December 31, 2008.

In the opinion of the management, impact arising from changes in the values of trading assets (including derivative contracts, trade receivable, trade payables, other current assets and liabilities) is temporary and short term in nature and would vary depending on the levels of these current assets and liabilities substantially from time to time and even on day to day basis and hence are not useful in an analysis of the long term risks which the Company is exposed to.

This is the first year of adoption of Accounting Standard 3D, consequently comparative figures relating to 2007 in respect of disclosures under Accounting Standard 30 have been provided only where such information is available.

From Auditors’ Report

d) The Company has early adopted Accounting Standard 30 ‘Financial Instruments: Recognition and Measurement’, along with the limited revision to Accounting Standard 2 ‘Valuation of Inventories’, Accounting Standard 11 ‘The Effect of Changes in Foreign Exchange Rates’, Accounting Standard 21 ‘Consolidated Financial Statements and Accounting for Investment in Subsidiaries in Separate Financial Statements’, Accounting Standard 23 ‘Accounting for Investments in Associates in Consolidated Financial Statements’, Accounting Standard 26 ‘Intangible Assets’, Accounting Standard 27 ‘Financial Reporting of Interest in Joint Ventures’, Accounting Standard 28 ‘Impairment of Assets’, and Accounting Standard 29 ‘Provisions, Contingent Assets and Contingent Liabilities, arising from the announcement of the Institute of Chartered Accountants of India on 29 March 2008, as stated in Note B.6 of Schedule P to the financial statements. Pursuant to the above, as detailed in note B.6.6 of Schedule P to the financial statements, certain US Dollar investments in subsidiaries and joint ventures have been designated as hedged items in a fair value hedge for changes in spot rates and have been restated at the closing exchange rate at December 31, 2008 and a credit of Rs. 923.40 Million has been recognised in the Profit and Loss Account, as compared to the earlier policy of valuing these investments at cost less diminution that is other than temporary, as required under Accounting Standard 13 ‘Accounting for Investments’, notified under section 211 (3C) of the Companies Act, 1956.

e) read with our comments in paragraph (d) above, in our opinion, the Balance Sheet, the Profit and Loss Account and the Cash Flow Statement dealt with by this report comply with the Accounting Standards referred to in sub-Section (3C) of Section 211 of the Companies Act, 1956.

From Management Discussions and Analysis

Early adoption of Accounting Standard 30 and IFRS convergence

The Company has early adopted Accounting Standard 30 : Financial Instruments: Recognition and Measurement and the consequential limited revisions to other applicable Accounting Standards as have been announced by the ICAI. Accordingly, the Company has changed the designation and measurement principles for all its significant financial assets and liabilities including FCCBs and ECBs. In case where there are conflicts between provisions of AS 30 and Companies Act, 1956, provisions of Companies Act, 1956 have been followed.

Detailed disclosures in this regard have been made in Note 1.11 of Part A, Note 6 and 33 of Part B of Schedule – ‘P’ to the financial statements forming part of the Annual Report.

Accounting Standards 30, 31 and 32 are new accounting Standards, to be made mandatory from April 01, 2011. These are global standards in line with IAS 39, as a prelude to IFRS Convergence. By adopting Accounting Standard 30 the company is progressing towards IFRS convergence.

Toolings classified as Inventories (pending receipt of opinion from EAC of ICAI)

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  1. Toolings classified as Inventories (pending receipt of
    opinion from EAC of ICAI)


Vesuvius India Ltd. — (31-12-2008)

From Accounting Policies :

Inventories :

Toolings are considered as inventories and are amortised on
a straight-line basis over a period of three years based on their estimated
useful lives. The Company’s statutory auditors are of the view that such
toolings are in the nature of moulds that are used in the production of
finished goods and hence should be classified as fixed assets and depreciated
over their estimated useful lives of three years. The company is in the
process of obtaining the opinion of the Expert Advisory Committee of the
Institute of Chartered Accountants of India regarding appropriate
classification and accounting of such toolings considering their nature.

 

Had the toolings been classified as fixed assets, the gross
block and net block of fixed assets would have been higher by Rs.140,560
thousand (Previous year Rs.106,881 thousand) and Rs.47,917 thousand (Previous
year Rs.42,564 thousand) respectively, while inventories would have been lower
by Rs.47,917 thousand (Previous year Rs.42,564 thousand).

 

Consequently, the depreciation charge for the year would
have been higher by Rs.26,893 thousand (Previous year Rs.24,961 thousand) and
the tolling charges would have been lower by Rs.26,893 thousand (Previous year
Rs.24,961 thousand).

 

The provisions for current tax and deferred tax release for
the year would have been higher by Rs.2,435 thousand (Previous year Rs.2,451
thousand) and Rs.2,435 thousand respectively. Deferred tax charge for the
previous year would have been lower by Rs.2,451 thousand. Considering the
amount of income taxes deposited by the Company, there will be no dues towards
interest under the provisions of the Income-tax Act, 1961 had these
adjustments been recognised.

 

From Auditors’ Report :

We draw attention to Note 1(iv) on Schedule 14 to the
financial statements. As explained in the note, the Company has classified
toolings as inventory which is being amortised over their estimated useful
lives of 3 years. In our opinion such toolings are fixed assets and should be
depreciated over their useful lives as explained in the aforesaid Note. Had
the toolings been classified as fixed assets, gross block and net block of
fixed assets would have been higher by Rs.140,560 thousand (Previous year
Rs.106,881 thousand) and Rs.47,917 thousand (Previous year Rs.42,564 thousand)
respectively, which inventories would have been lower by Rs.47,917 thousand
(Previous year Rs.42,564 thousand). Consequently, the depreciation charge for
the year would have been higher by Rs.26,893 thousand (Previous year Rs.24,961
thousand) and the tooling charges would have been lower by an equivalent
amount. However, there is no impact on the profit after tax.

 

In view of the significance of the matter, we believe that
the divergent views on the matter need to be resolved through reference to the
Expert Advisory Committee (EAC) of the Institute of Chartered Accountants of
India. The Company is in the process of making such a reference. Accordingly,
the opinion expressed in paragraph 5 below should be considered pending
reference of the matter to the EAC and the confirmation by the EAC of the
classification and accounting followed by the Company.

 

From Directors’ Report :

Difference in opinion expressed by Auditors in para 4(f) of
their Report to Members of the Company dated February 24, 2009 relate to
classification of toolings which according to the Auditors should be
classified under fixed assets. The Company is consistently following the
normal industry practice of classifying them as inventory. In either case
there is no impact on profits after tax.


levitra

Scheme of arrangement with High Court approvals

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  1. Scheme of arrangement with High Court approvals


Nestle India Ltd. — (31-12-2008)

From Notes to Accounts :

During the calendar year 2007, the Company had sought
approval of the Delhi High Court under Sections 391 to 394 of the Companies
Act, 1956 for a Scheme of Arrangement (‘Scheme’) between the Company and its
shareholders and creditors. The Scheme envisaged utilisation of following
amounts for payment to the shareholders, subject to applicable taxes :

(i) An amount of Rs.432,363 thousands as lying in the
Share Premium Account of the Company; and

(ii) An amount of Rs.430,857 thousands from the General
Reserve Account of the Company, which was voluntarily transferred by the
Company in excess of the prescribed 10% of the profits of the Company in
accordance with the provisions of the Companies (Transfer of Profit to
Reserves) Rules, 1975 during the financial years 1981 to 1996.

 


The equity shareholders supported the Scheme at a meeting
held on May 3, 2007 as per directions of the Delhi High Court. Subsequently,
the Delhi High Court vide its Order dated September 30, 2008 sanctioned the
aforesaid Scheme and the Scheme became effective from October 31, 2008 after
filing of the certified copy of the aforesaid Order with the Registrar of
Companies NCT of Delhi and Haryana. Thereafter as per the Scheme, after
deducting applicable corporate dividend tax for the aggregate amount of
Rs.863,220 thousands credited to the Profit and Loss Account, a Special
Dividend of Rs.7.50 (Rupees seven and paise fifty only) per share calculated
by dividing the net amount by the outstanding 96,415,716 equity shares of face
value of Rs.10 each and rounding it off to the nearest half Rupee, was paid on
November 26, 2008 to those shareholders whose name appeared in the Register of
Members/Beneficial Owners on November 17, 2008.

 

levitra

Transactions covered u/s 297 of the Companies Act, 1956

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1. Transactions covered u/s 297 of the Companies Act, 1956

Avaya Global Connect Ltd. — (30-9-2008)

 From Notes to Accounts :

    In respect of contracts for the provision/supply of services/goods, with a private company in which a Director of the Company is Director, the Company is of the view that the provisions of Section 297 of the Companies Act, 1956 are not applicable. However, as a matter of abundant caution, the Board of Directors of the Company in their meeting held on 26th October, 2007 resolved to make an application seeking the approval of the Central Government.

     

    Pursuant to above, Company has filed application under section 621(A) for compounding of offence committed under section 297 of the Companies Act, 1956, for the transactions entered in 2006-07 and in 2007-08 (upto February 24, 2008) for which approval is pending. The Company has obtained Central Government approval for entering into transactions with the above mentioned Company from the date of approval February 25, 2008 to September 30, 1010.

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Business expenditure — Whether aid given to the residents living in the vicinity of the factory of the assessee is a business expenditure allowable u/s.37 of the Act is a question on which finding of fact should be given by the Tribunal.

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  1. Business expenditure — Whether
    aid given to the residents living in the vicinity of the factory of the
    assessee is a business expenditure allowable u/s.37 of the Act is a question
    on which finding of fact should be given by the Tribunal.

[CIT v. Madras Refineries
Ltd., (2009) 313 ITR 334 (SC)]

During the previous year
relevant to the A.Y. 1993-94, the assessee’s claim with respect to social and
welfare community expenses was disallowed by the Assessing Officer. Aggrieved
by the said order, the assessee filed an appeal before the Commissioner of
Income-tax (Appeals), who allowed the appeal deleting the disallowance.
Against the said order, the Revenue preferred an appeal before the Income-tax
Appellate Tribunal, which dismissed the appeal.

Further on an appeal,
following the decisions in CIT v. Madras Refineries Ltd., (2004) 266
ITR 170 and Cheran Engineering Corporation Ltd. v. CIT, (1999) 238 ITR
892, the Madras High Court held that the social and welfare community expenses
were deductible as business expenditure.

On an appeal before the
Supreme Court by the Revenue, it was argued on behalf of the assessee that the
aid given to the residents living in the vicinity of the factory of the
assessees was a business expenditure allowable u/s.37 of the Income-tax Act.
The Supreme Court, however, did not find any finding on this aspect in the
judgment of the Tribunal as well as in the judgment of the High Court and
therefore, set aside the impugned judgment of the High Court and remitted the
matter to the Tribunal for de novo examination of this point in
accordance with law.

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Wealth-tax : Penalty : Legal representative : S. 15B, S. 18 and S. 19 of Wealth-tax Act, 1957 : A.Ys. 1968-69, 1970-71, 1971-72, 1983-84 and 1984-85 : Assessee filing returns and receiving notices for penalty : Penalty order passed after death of assessee

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II. Reported :

  1. Wealth-tax : Penalty : Legal representative : S. 15B, S. 18 and S. 19 of Wealth-tax Act, 1957 : A.Ys. 1968-69, 1970-71, 1971-72, 1983-84 and 1984-85 : Assessee filing returns and receiving notices for penalty : Penalty order passed after death of assessee on legal representative : Not justified.

[ACIT v. Late Shrimant F. P. Gaekwad, 313 ITR 192 (Guj.)]

For the A.Ys. 1968-69, 1970-71, 1971-72, 1983-84 and 1984-85 the assessee had filed the returns of wealth. At the time of assessment, penalty proceedings were initiated u/s.18(1)(a), u/s.18(1)(c) and u/s.15B of the Wealth-tax Act, 1957. The assessee expired in 1988 before the penalty proceedings could be completed. The estate of the assessee devolved upon his mother who also passed away and thereafter it devolved upon the sister of the assessee. On 29-8-2003 the Assessing Officer passed penalty orders u/s.18(1)(a), u/s.18(1)(c) and u/s.15B of the Act. The Tribunal cancelled the penalty orders.

On appeal by the Revenue, the Gujarat High Court upheld the decision of the Tribunal and held as under :

“(i) No penalty order was passed during the life-time of the deceased. To make the legal representative liable for penalty u/s.19(1) it was not enough that the penalty proceedings should be initiated during the lifetime of the deceased. It was also necessary that such penalty proceedings must result in penalty orders during his lifetime. Therefore, neither S. 19(1) nor S. 19(3) casts any obligation on the executor, administrator or other legal representative to pay the amount of penalty as they were not liable to face any such penalty proceedings for which they have not committed any default.

(ii) The default, if any, was committed by the assessee and the assessee was not alive when the penalty proceedings culminated in penalty orders.”

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Reassessment : S. 147 and S. 148 of Income-tax Act, 1961 : A.Ys. 1996-97 to 1998-99 and 2001-02 : Reason to believe : Satisfaction not of AO of the assessee but borrowed from another AO : Not sufficient : Reopening not valid.

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II. Reported :

  1. Reassessment : S. 147 and S. 148 of Income-tax Act, 1961 :
    A.Ys. 1996-97 to 1998-99 and 2001-02 : Reason to believe : Satisfaction not of
    AO of the assessee but borrowed from another AO : Not sufficient : Reopening
    not valid.

[CIT v. Shree Rajasthan Syntex Ltd., 313 ITR 231 (Raj.)]

The assessee company had leased out certain plant and
machinery to another company. The depreciation claimed by the assessee on the
capital asset so leased out was allowed by the Assessing Officer. The lessee
had claimed revenue expenditure for the lease rent paid to the assessee but
the Assessing Officer had allowed depreciation on the capital value of the
plant and machinery. On noticing this fact, the Assessing Officer of the
assessee, reopened the completed assessments and disallowed the claim for
depreciation. The Tribunal held that the reopening was not valid as the
satisfaction was not of the Assessing Officer of the assessee, but that of the
Assessing Officer of the lessee.

On appeal by the Revenue, the Rajasthan High Court upheld
the decision of the Tribunal and held as under :

“The reassessment proceedings had been initiated only on
account of the opinion of the Assessing Officer of the lessee and the
Tribunal was right in finding that it was ‘borrowed satisfaction’ which was
not sufficient to confer power on the Assessing Officer to initiate
reassessment proceedings against the assessee.”

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Penalty : Concealment : S. 271(1)(c) of Income-tax Act, 1961 : A.Y. 1993-94 : Bona fide claim for exemption in terms of conflicting determination of law : Assessee disclosed entire facts : Imposition of penalty not justified : Judgment of Supreme Court in

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II. Reported :

  1. Penalty : Concealment : S. 271(1)(c) of Income-tax Act,
    1961 : A.Y. 1993-94 : Bona fide claim for exemption in terms of
    conflicting determination of law : Assessee disclosed entire facts :
    Imposition of penalty not justified : Judgment of Supreme Court in the case of
    UOI v. Dharmendra Textile Processors, 306 ITR 277 (SC) considered.

[CIT v. Haryana Warehousing Corporation, 314 ITR 215
(P&H)]

The assessee, a warehousing corporation had made a claim
for exemption u/s.10(29) of the Income-tax Act, 1961 in respect of which there
were conflicting decisions. The claim for exemption was disallowed by the
Assessing Officer and a penalty of Rs. 1,04,61,330 was imposed u/s.271(1)(c)
of the Act. The Tribunal cancelled the penalty.

On appeal by the Revenue, the Punjab and Haryana High Court
upheld the decision of the Tribunal and held as under :

“(i) The deduction claimed by the assessee was legitimate
and bona fide in terms of the conflicting determination of law on the
proposition in question. The categorical finding at the hands of the
Tribunal in its order was that the assessee had disclosed the entire facts
without having concealed any income. There was no allegation against the
assessee that it had furnished inaccurate particulars of income. The
determination of the Tribunal had not been controverted even in the grounds
raised in the appeal. The assessee was guilty of neither of the two
conditions. Therefore, in the absence of the two pre-requisites postulated
u/s.271(1)(c) it was not open to the Revenue to inflict any penalty on the
assessee.

(ii) The second contention advanced by the appallent-Revenue
was that the impugned order passed by the Income-tax Appellate Tribunal
deleting the penalty imposed on the respondent-assessee u/s.271(1)(c) of the
Act was not sustainable in law because of the clear judgment in UOI v.
Dharmendra Textile Processors, (2008) 306 ITR 277. According to the
learned counsel for the appellant-Revenue, the entire income which remained
undisclosed, ‘with or without’ any conscious act of the assessee was liable
to penal action. It is submitted by the learned counsel for the
appellant-Revenue that the concept of law with regard to levy of penalty has
drastically changed in view of the said judgment, inasmuch as now penalty
can be levied even when an assessee claims deduction or exemption by
disclosing the correct particulars of its income. According to the learned
counsel, if an addition is made in quantum proceedings by the Revenue
authorities, which addition attains finality, an assessee per se
becomes liable for penal action u/s.271(1)(c) of the Act. It is the vehement
contention of the learned counsel for the appellant-Revenue that a penalty
automatically becomes leviable against the respondent-assessee u/s.271(1)(c)
of the Act, after the finalisation of quantum proceedings. In this behalf,
it is also pointed out that in view of the judgment of the Supreme Court,
referred to above, the dichotomy between penalty proceedings and assessment
proceedings stands completely obliterated.

(iii) It is also essential for us to notice, while
dealing with the second submission advanced by the learned counsel for the
appellant-Revenue, that the issue which arose for determination before the
Supreme Court in UOI v. Dharmendra Textile Processors (supra)
was whether u/s.11AC inserted in the Central Excise Act, 1944, by the
Finance Act, 1996, penalty for evasion of payment of tax had to be
mandatorily levied, in case of short of levy or non-levy of duty under the
Central Excise Act, 1944, irrespective of the fact whether it was an
intentional or innocent omission. In other words, the Apex Court was
examining a proposition whether mens rea was an essential ingredient
before penalty u/s.11AC of the Central Excise Act, 1944, could be levied. In
view of the factual position noticed herein above, the issue of mens rea
does not arise in the present controversy because the ingredients, before
any penalty can be imposed on an assessee u/s.271(1)(c) of the Act, were not
made out in the instant case as has been concluded in the foregoing
paragraph. Thus viewed, the judgment relied upon by the learned counsel for
the appellant-Revenue is, besides being a judgment under a different
legislative enactment, is totally inapplicable to the facts and
circumstances of this case. Accordingly, we find no merit even in the second
contention advanced by the learned counsel for the appellant-Revenue.”

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Appellate Tribunal : Powers : Search : Block assessment : S. 132 and S. 158B of Income-tax Act, 1961 : Tribunal cannot go into validity or otherwise of administrative decision for conducting search and seizure.

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II. Reported :


58. 


Appellate Tribunal : Powers : Search : Block assessment : S. 132 and S. 158B of
Income-tax Act, 1961 : Tribunal cannot go into validity or otherwise of
administrative decision for conducting search and seizure.


[CIT v. Paras Rice Mills, 313 ITR 182 (P&H)]


In an appeal before the Tribunal against a block assessment order the assessee
raised the ground that the search and the consequent block assessment order were
not valid. The Tribunal held that the search and seizure was illegal as no
material was produced to show that the requirements of S. 132 (1) of the Act
were complied with.


On appeal by the Revenue, the Punjab & Haryana High Court held as under :


“While hearing an appeal against the order of assessment, the Tribunal could not
go into the question of validity or otherwise of any administrative decision for
conducting search and seizure. It could be challenged in an independent
proceeding where the question of validity of the order could be gone into. The
appellate authority was concerned with the correctness or otherwise of the
assessment.”

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Appellate Tribunal : Powers : Search : Block assessment : S. 132 and S. 158B of Income-tax Act, 1961 : Tribunal can look into validity of search : Authorisation for search not valid : Consequent search and block assessment also not valid : Tribunal justif

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II. Reported :

  1. Appellate Tribunal : Powers : Search : Block assessment :
    S. 132 and S. 158B of Income-tax Act, 1961 : Tribunal can look into validity
    of search : Authorisation for search not valid : Consequent search and block
    assessment also not valid : Tribunal justified in setting aside block
    assessment order.

[CIT v. Smt. Chitra Devi Soni, 313 ITR 174 (Raj.)]

In the appeal before the Tribunal against the block
assessment order the assessee contended that there was no material with the
Director to form the belief as was required u/s.132(1) of the Income-tax Act,
1961 and therefore the search and the block assessment order were not valid.
The Tribunal held that the search was not valid in the absence of
authorisation based on reasons as required u/s.132(1) and consequently the
block assessment was illegal.

On appeal by the Revenue challenging the jurisdiction of
the Tribunal to look into the validity of search the Rajasthan High Court
upheld the decision of the Tribunal and held as under :

“(i) Since the assessment in the present case is made
under Chapter XIV-B and when it was specifically challenged by the assessee,
that the circumstances contemplated by S. 132(1) did not exist, this is a
matter which goes to the root of the matter about jurisdiction of the
assessing authority to proceed under Chapter XIV-B, the Tribunal was very
much justified, and had jurisdiction to go into the question as to whether
the search was conducted consequent upon the authorisation having been
issued in the background of the existence of eventualities and material
mentioned in 132(1).

(ii) The basic ingredient of the term ‘block period’
u/s.158B of the Income-tax Act, 1961, is that it relates to a certain number
of years relating to and relevant to the search conducted u/s.132. The
conclusion is that there should be a search conducted u/s.132. S. 132
contemplates existence of certain eventualities, in the event of existence
whereof, the competent authority should have reason to believe the existence
of the circumstances mentioned in clauses (a) to (c) of S. 132(1). The
consequence is that if the requirement of Ss.(1) about the existence of the
reason to believe consequent upon the information in the possession of the
concerned authority is not satisfied there could possibly be no
authorisation, irrespective of the fact that it may have been made and in
turn if a search is conducted in pursuance of the authorisation issued in
the absence of the requisite sine qua non the search cannot be a
‘search’ u/s.132 of the Act, as contemplated by the provisions of S. 158B of
the Act.

(iii) The Revenue failed to produce records containing
relevant material including information in the possession of the competent
authority, on the basis of which it had entertained the reason to believe
the existence of one or more of the eventualities covered by clauses (a) to
(c) of S. 132(1). In the absence of a legal search, in accordance with
provisions of S. 132 the ‘block period’ or the previous year in which the
search was conducted could not be said to have come into existence and
therefore any assessment order based on such search could not stand.

(iv) The Tribunal was justified in holding that when the
authorisation to conduct the search based on reasons germane to S. 132(1)
did not exist the search became invalid and that the assessment order based
on such search could not stand and had rightly set it aside.”

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Appellate Tribunal : Powers : Litigation between public sector undertaking of State Government and Income-tax Department : No power to decide whether appeal to be admitted : Refusal to admit appeal relegating parties to Committee of Disputes : Not permiss

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II. Reported :

  1. Appellate Tribunal : Powers : Litigation between public
    sector undertaking of State Government and Income-tax Department : No power to
    decide whether appeal to be admitted : Refusal to admit appeal relegating
    parties to Committee of Disputes : Not permissible.

[Gujarat Mineral Development Corporation Ltd. v. ITAT,
314 ITR 14 (Guj.)]

The assessee, a public sector undertaking of the Government
of Gujarat, filed appeals before the Income-tax Appellate Tribunal. The
Department also filed cross appeals. Without going into the merits of the
matter, the Tribunal non-suited the parties by refusing to admit the appeals
without approval of the Committee of Disputes.

The Gujarat High Court allowed the writ petitions and
appeals against the said orders of the Tribunal and held as under :

“(i) The Supreme Court in the three ONGC cases and in
Chief Conservator of Forests, Government of AP v. Collector, (2003) 3
SCC 472 and MTNL v. Chairman CBDT, (2004) 267 ITR 647 was dealing
with disputes between a public sector undertaking of the Central Government
and a Department of the Central Government or between two Departments of the
State Government of Andhra Pradesh. The directions given and the
observations made by the Supreme Court therein have to be read in the
context and against the backdrop of the controversy before the Court,
including the litigants who were before it. There is no order made by the
Supreme Court which relates to a dispute between the Union of India and a
State, or a public sector undertaking of the Union of India and a State, or
between two States inter se, the term ‘State’ here meaning and
including the State Government, a Department of the State Government or an
undertaking of the State Government. None of these cases suggest that the
Committee set up by the Central Government would have jurisdiction to
consider resolution of such disputes between a State and the Union, the
respective Departments and undertakings included.

(ii) Hence, it is not possible to expand the scope of the
directions of the Supreme Court so as to include a dispute between a
Department of the Central Government and a State Government undertaking.

(iii) The Income-tax Appellate Tribunal is a creature of
statute. Such a constituted Tribunal is required to exercise powers and
discharge the functions conferred on the Tribunal by the Act. The Tribunal,
therefore, cannot exercise powers or discharge functions which are not
conferred on the Tribunal by the Act.

(iv) The powers available to the Tribunal are governed by
the provisions of S. 253 and S. 254 of the Act. These provisions cannot be
read to mean that the Tribunal has power to hold that an appeal is not
admitted.

(v) Both the assessee and the Department are statutorily
vested with a right under the Act by virtue of S. 253(1), (2) and (4) of the
Act to file an appeal or cross-objections. Such right granted by the statute
cannot be divested by the Tribunal on an erroneous assumption of powers
arrogated to itself under a mistaken belief of law.

(vi) The Tribunal had assumed powers which it did not
have, for determining whether the appeal was to be admitted or not. There
was no such requirement in the facts of the case to approach the Committee
as the assessee and the Income-tax Department could not be asked to go and
obtain clearance from a Committee which had no jurisdiction over them.

(vii) The appeals filed by the assessee and the
Department before the Tribunal were accordingly restored to the file of the
Tribunal for being heard and decided afresh on the merits in accordance with
law.”

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Reassessment : Notice u/s.148 of Income-tax Act, 1961 : A.Ys. 1991-92 and 1993-94 : Assessee Co-operative Housing Society : Notice u/s.148 issued claiming that transfer fee is liable to tax relying on judgment of Bombay High Court in CIT v. The Presidency

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I. Unreported :

  1. Reassessment : Notice u/s.148 of Income-tax Act, 1961 :
    A.Ys. 1991-92 and 1993-94 : Assessee Co-operative Housing Society : Notice
    u/s.148 issued claiming that transfer fee is liable to tax relying on judgment
    of Bombay High Court in CIT v. The Presidency Co-operative Housing Society,
    216 ITR 321 (Bom.) : Reopening not valid : Notice quashed.


[Mittal Court Premises Co-operative Society Ltd. v. ITO
(Bom.), W. P. No. 526 of 1996, dated 17-7-2009]

In this case the assessee is a co-operative society of
commercial premises. As provided in the bye-laws the assessee had received
transfer fees from the transferees. On the basis of principles of mutuality
the transfer fees were not offered for tax. The Assessing Officer issued
notice u/s.148 proposing to assess the transfer fees to tax relying on the
judgment of the Bombay High Court in the case of CIT v. The Presidency
Co-operative Housing Society, 216 ITR 321 (Bom.).

On a writ petition challenging the notice u/s.148, the
Bombay High Court quashed the notice and held as under :

“(i) Notices basically have been issued on the ground
that the transfer fees received by the petitioners from incoming members was
assessable to tax considering the judgment of this Court in the case of
CIT v. The Presidency Co-operative Housing Society, 216 ITR 321 (Bom.)

(ii) We have in the judgment delivered today in
Income-tax Appeal No. 931 of 2004 and other connected appeals distinguished
the same on the ground that the issue of mutuality had not at all been in
issue before the learned Bench when it decided the reference. Once we have
held the transfer fee even paid by incoming members is not assessable to tax
applying the doctrine of mutuality, the notice issued would be without
jurisdiction and consequently will have to be set aside.”

 



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Settlement Commission : Abatement of proceedings : S.245D(4A)(1), S.245HA(1) (iv) and S. 245HA(3) not valid : Settlement applications not disposed of by 31-3-2008 for reasons not attributable to the applicant cannot be treated as having abated.

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I. Unreported :


 



  1. Settlement Commission : Abatement of
    proceedings : S.245D(4A)(1), S.245HA(1) (iv) and S. 245HA(3) not valid :
    Settlement applications not disposed of by 31-3-2008 for reasons not
    attributable to the applicant cannot be treated as having abated.

[Star Television News Ltd. v. UOI (Bom.), W.P. No.
952 of 2008 dated 7-8-2009]

The Finance Act, 2007, amended S. 245D(4A) and S. 245HA to
provide that if in respect of a settlement application filed before 1-6-2007,
the Settlement Commission did not pass a final order before 31-3-2008, the
proceedings would abate. In a group of writ petitions the constitutional
validity of the said amendment was challenged. The Bombay High Court allowed
the petitions and held as under :

“(i) The fixing of the cut-off date u/s.245D(4A)(i), the
abatement of proceedings u/s.245HA(1)(iv) and the making available of
confidential information u/s.245HA(3) for no fault of the applicant are
ultra vires the Constitution. In order to save these provisions from
being struck down as being unconstitutional, they will have to be read down
as applying only to cases where the Settlement Commission is unable to pass
an order on or before 31-3-2008 for any reasons attributable on the part of
the applicant.

(ii) Accordingly, the Settlement Commission has to
consider whether the proceedings have been delayed on account of any reasons
attributable on the part of the applicant. If it comes to the conclusion
that it is not so, then it has to proceed with the application as if not
abated.

(iii) The Government shall consider appointment of more
benches of the Settlement Commission if it desires early disposal of pending
applications.”


 



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Co-operative housing society : Commercial premises : Transfer fees and non-occupancy charges : Principle of mutuality applies : Notification of State of Maharashtra putting restriction on amount of transfer fees applies only to residential societies and n

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I. Unreported :

  1. Co-operative housing society : Commercial premises :
    Transfer fees and non-occupancy charges : Principle of mutuality applies :
    Notification of State of Maharashtra putting restriction on amount of transfer
    fees applies only to residential societies and not to commercial premises :
    Transfer fees and non-occupancy charges not liable to tax.

[Mittal Court Premises Co-operative Society Ltd. v. ITO
(Bom.), ITA No. 999 of 2004, dated 17-7-2009]

In this case the assessee is a co-operative society of
commercial premises. As provided in the bye-laws, the assessee had received
transfer fees from the transferees and non-occupancy charges from the members.
As regards the transfer fees the Tribunal relied on the decision of the
Special Bench in the case of Walkeshwar Triveni Co-operative Housing
Society Ltd v. ITO, (2004) 88 ITD 159 (Mum.) (SB) and held that the
transfer fees being received from the transferee is not exempt on the basis of
the principles of mutuality. As regards the non-occupancy charges the Tribunal
held that the principles of mutuality would be applicable, but subject to the
10% limit prescribed by the State Government.

On appeal by the assessee, the Bombay High Court referred
to its judgment in the case of Sind Co-op. Housing Society v. ITO, (Bom.),
ITA No. 931 of 2004, dated 17-7-2009 (see August issue) and held as under :

“(i) In Income-tax Appeal No. 931 of 2004 along with
other appeals which we have decided by the separate judgment today, we have
set out the various facts and consequently, the Government Notifications
involved as also the provisions of the Act and the Rules and as such, it is
not necessary to refer to them once again. Suffice it to say that the
Notification issued by the State of Maharashtra putting restrictions on the
amount of transfer fee when the member desires to transfer his shares or
occupancy rights applies only in respect of housing residential societies.
In the instant case, the appellants before us are not housing residential
societies and consequently, those Notifications would not be applicable.

(ii) Insofar as the transfer fee is concerned, the
Tribunal held that it is covered by the decision of the Special Bench in the
case of Walkeshwar Triveny Co-operative Housing Society Ltd. The Tribunal
also noted that the transferees were admittedly not members of the assessee
society on the date on which the payments were made to the assessee society.
The transferees were admitted as members of the society and flats were
entered in their names only after the impugned payments were made to the
assessee society. It was also found that the amounts were paid in excess of
the Government Notifications and consequently, the amount paid as transfer
fees are exigible to tax.

(iii) There is an agreement by which the amount is paid
by the transferee. Insofar as the society is concerned, even if receipt is
issued in the name of transferee it is the nature of admission fee which
could be appropriated only on the transferee being admitted. Merely because
the amount may be appropriated earlier, it will not lose the character of
the amount being paid by a member. As held by us in Income-tax Appeal No.
931 of 2004, the same reasonings will apply to the appellants/petitioners
before us. In the circumstances, question as framed has to be answered in
the negative in favour of the assessee and against the Revenue.

(iv) That brings us to the issue insofar as non-occupancy
charges are concerned. Non-occupancy charges are again payable by a member
on account of the fact that the member is not occupying premises. Bye-laws
themselves provide for non-occupancy charges. Contribution therefore, is by
the member. Object of the contribution is for the purpose of increasing the
society’s funds, which could be used for the object of the society. Object
of the society as noted earlier is to provide service, amenities and
facilities to its members. In these circumstances, in our opinion, the
principles of mutuality as discussed in Income-tax Appeal No. 931 of 2004
must also apply.

(v) The learned counsel for the Revenue contended that
the amount of non-occupancy charges over and above 10% of the maintenance
charges should be held to be assessable to tax. In our opinion, the 10%
limit is not applicable to the commercial society like the appellant
herein.”

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Business expenditure : S. 37 of Income-tax Act, 1961 : Expenditure incurred on issue of convertible debentures : Is revenue expenditure allowable as deduction ?

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I. Unreported :


52. 


Business expenditure : S. 37 of Income-tax Act, 1961 : Expenditure incurred on
issue of convertible debentures : Is revenue expenditure allowable as
deduction ?


[CIT v. M/s. Secure Meters Ltd. (Raj.), ITA No. 8 of 2007, dated
20-11-2008 (Not reported)]


The assessee incurred expenditure on issue of convertible debentures : The
assessee’s claim for deduction of the expenditure was rejected on the ground
that it is capital expenditure. The Tribunal held that the expenditure is
revenue expenditure and allowed the deduction.


In appeal, the Revenue contended that convertible debentures were akin to shares
and that in line with the judgment of the Supreme Court in Brooke Bond India
v. CIT, 225 ITR 798 (SC), the expenditure was capital in nature.


The Rajasthan High Court upheld the decision of the Tribunal and held as under :


“A debenture, when issued, is a loan. The fact that it is convertible does not
militate against it being a loan. In accordance with the judgment of the Supreme
Court in the case of India Cement v. CIT, 60 ITR 52 (SC), expenditure on
loan is always revenue in nature even if loan is taken for capital purposes.
Consequently the expenditure on convertible debenture is admissible as revenue
expenditure.”

 

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Capital gains — In a case where computation provision cannot apply, such a case would not fall within S. 45 — Artex Manufacturing’s case distinguished on facts.

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  1. Capital gains — In a case where computation provision
    cannot apply, such a case would not fall within S. 45 — Artex Manufacturing’s
    case distinguished on facts    .

[PNB Finance Ltd. v. CIT, (2008) 307 ITR 75 (SC)]

 

The Punjab National Bank Ltd. was set up in 1895 in an area
which now falls in Pakistan. It was nationalised as Punjab National Bank (PNB)
by the Banking Companies (Acquisition and Transfer of Undertaking) Act, 1970.
On July 19, 1969 PNB Ltd. the appellant herein, on nationalisation received
compensation of Rs.10.20 crores. This compensation was calculated on the basis
of capitalisation of last 5 years’ profits. The said compensation was received
during the accounting year ending December 31, 1969, corresponding to the A.Y.
1970-71. During the A.Y. 1970-71, the appellant had to compute capital gains
u/s.48 by deducting from the sale consideration the cost of acquisition as
increased by the cost of improvement and expenses incurred in connection with
the transfer. Under the law then prevailing, the assessee could index the cost
of acquisition. A return was filed in this case by the assessee showing an
income of Rs.2,03,364.

 

The assessee in the course of assessment proceedings
submitted that he had an option u/s.55(2)(i) of having the value ascertained
as on January 1, 1954, whichever is higher, but could not exercise it as the
cost of acquisition in this case was not computable. In the alternative, the
assessee submitted the fair market value of the undertaking as on January 1,
1954. By letter dated September 30, 1970, the assessee claimed a capital loss.

 

The Assessing Officer, however, proceeded to hold on the
basis of capitalisation of the last 5 years’ profits the capital gains of
Rs.1,65,34,709.

 

Aggrieved by the decision of the Assessing Officer, the
matter was carried in appeal by the assessee to the Appellate Assistant
Commissioner who came to the conclusion that, in this case, it was not
possible to allocate the full value of the consideration received
(compensation) amounting to Rs.10.20 crores between various assets of the
undertaking and, consequently, it was not possible to determine the cost of
acquisition and cost of improvement under the provisions of S. 48 of the 1961
Act and since computation was inextrically linked with the charging provisions
u/s.45 of the said Act it was not possible to tax the tax the surplus, if any,
u/s.45 of the 1961 Act. Aggrieved by the decision of the Commissioner, the
Department went by way of appeal to the Tribunal which took the view that, in
this case, since the assessee had exercised its option for substitution of the
fair market value of the undertaking as on January 1, 1954, it was not open to
the assessee to contend that the cost of acquisition was not computable and,
therefore, the Assessing Officer was right in arriving at the figure of
capital gains fixed by him at Rs.1,65,34,709.

 

For the first time, relying upon S. 41(2), the High Court
dismissed the reference initiated at the behest of the assessee.

 

On an appeal, the Supreme Court held that as regards
applicability of S. 45, three tests are required to be applied. The first test
is that any surplus accruing on transfer of capital assets is chargeable to
tax in the previous year in which transfer took place. In this case, transfer
took place on July 18, 1969. The second test which needs to be applied is the
test of allocation/attribution. This test is spelt out in the judgment of this
Court in Mugneeram Bangur and Co. (Land Department) (1965) 57 ITR 299. This
test applies to a slump transaction. The object behind this test is to find
out whether the slump price was capable of being attributable to individual
assets, which is also known as itemwise earmarking. The third test is that
there is a conceptual difference between an undertaking and its components.
Plant machinery and dead stock are individual items of an undertaking. A
business undertaking can consist of not only tangible items but also
intangible items like, goodwill, manpower, tenancy rights and value of banking
licence. However, the cost of such items (intangibles) is not determinable. In
the case of CIT v. B. C. Sriniwasa Setty reported in [1981] 128 ITR
294, this Court held that S. 45 charges the profits or gains arising from the
transfer of a capital asset to Income-tax. In other words it charges surplus
which arises on the transfer of a capital asset in terms of appreciation of
capital value of that asset. In the said judgment, this Court held that the
‘asset’ must be one which falls within the contemplation of S. 45. It is
further held that, the charging Section and the computation provisions
together constitute an integrated code and when in a case the computation
provisions cannot apply, such a case would not fall within S. 45. In the
present case, the banking undertaking, inter alia, included intangible
assets like goodwill, tenancy rights, manpower and value of banking licence.
On the facts, the Supreme Court found that itemwise earmarking was not
possible. On the facts, it was found that the compensation (sale
consideration) of Rs.10.20 crores was not allocable item-wise as was the case
in Artex Manufacturing Co. (1997) 227 ITR 260. For the aforestated reasons,
the Supreme Court held that on the facts and circumstances of this case, which
concerned A.Y. 1970-71, it was not possible to compute capital gain and,
therefore, the said amount of Rs.10.20 crores was not taxable under Setion 45
of the 1961 Act. Accordingly, the impugned judgment was set aside. The Supreme
Court however, observed that in this case S. 55(2)(i) did not operationalise.
U/s.55(2), the fair market value as on January 1, 1954, could have substituted
the figure of cost of acquisition provided the figures of both ‘cost of
acquisition’ and ‘fair market value as on January 1, 1954’ were ascertainable.

Appeal to High Court : Power to condone delay : S. 260A of Income-tax Act, 1961 : No power to condone delay : Delay in filing appeal cannot be condoned

New Page 2

I. Unreported :

  1. Appeal to High Court : Power to condone delay : S. 260A of
    Income-tax Act, 1961 : No power to condone delay : Delay in filing appeal
    cannot be condoned.

[CIT v. M/s. Grasim Industries Ltd. (Bom.), N. M.
No. 787 of 2009 in I.T. Appeal (L) No. 3592 of 2008, dated 8-7-2009]

In this Notice of Motion the Revenue was seeking
condonation of delay in filing the appeal u/s.260A of the Income-tax Act,
1961.

Following the judgment of the Supreme Court in
Chaudharana Steels (P) Ltd v. CCE, (2009) 238 ELT 705 (SC) the Bombay High
Court held that the High Court had no power to condone delay in filing appeal
u/s.260A of the Act.

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Capital or Revenue — If the object of the subsidy scheme is to enable the assessee to run the business more profitably the receipt is on revenue account — if the object of the assistance under subsidy scheme is to enable the assessee to set up a new unit

New Page 1


 

  1. Capital or Revenue — If the object of the subsidy scheme is
    to enable the assessee to run the business more profitably the receipt is on
    revenue account — if the object of the assistance under subsidy scheme is to
    enable the assessee to set up a new unit or expand its existing unit, then the
    receipt is on capital account.



[CIT v. Ponni Sugars and Chemicals Ltd. (and other
connected appeals), (2008) 306 ITR 392 (SC)]

 

Co-operative Society — Deduction u/s.80P — Assessing
Authority should examine as to whether the society is engaged in its business
of banking or providing credit facilities to its members.

 

The Supreme Court was mainly concerned with the following
two questions in a batch of civil appeals, namely :

(i) Whether the incentive subsidy received by the
assessee is a capital receipt not includible in the total income ?

(ii) Whether the assessee was entitled to exemption
u/s.80P(2)(a)(i) of the Income-tax Act, 1961, in respect of the interest
received from the members of the society ?

 


For convenience the Supreme Court considered the 1980
scheme which was almost identical to 1987, 1988 and 1993 schemes. The dispute
pertained to the A.Y. 1986-87. In matter considered by the Supreme Court both
the above questions arose for determination. The incentives conferred under
that scheme were two-fold. First, in the nature of a higher free-sale sugar
quota and, second, in allowing the manufacturer to collect excise duty on the
sale price of the free-sale sugar in excess of the normal quota, but pay to
the Government only the excise duty payable on the price of levy sugar.

 

The Supreme Court observed that four factors existed in the
said schemes, which were as follows :

(i) Benefit of the incentive subsidy was available only
to new units and to substantially expanded units, not to supplement the
trade receipts.

(ii) The minimum investment specified was Rs.4 crores for
new units and Rs.2 crores for expansion units.

(iii) Increase in the free-sale sugar quota depended upon
increase in the production capacity.

(iv) The benefit of the scheme had to be utilised only
for repayment of term loans.

 


The main controversy arose in these cases because of the
reason that the incentive were given through the mechanism of price
differential and the duty differential. According to the Department, price and
costs are essential items that are basic to the profit making process and any
price related mechanism would normally be presumed to be revenue in nature. On
the other hand, according to the assessee, what was relevant to decide the
character of the incentive was the purpose test and not the mechanism of
payment.

 

According to the Supreme Court, the above controversy could
be resolved if it applied the test laid down in its judgment in the case of
Sahney Steel and Press Works Ltd. According to the Supreme Court the test to
be applied was that the character of the receipt in the hands of the assessee
had to be determined with respect to the purpose for which the subsidy was
given. The point of time at which the subsidy is paid is not relevant. The
source is immaterial. The form of subsidy is immaterial. If the object of the
subsidy scheme was to enable the assessee to run the business more profitably
then the receipt is on revenue account. On the other hand, if the object of
the assistance under subsidy scheme was to enable the assessee to set up a new
unit or to expand the existing unit then the receipt of the subsidy was on
capital account.

 

The Supreme Court referred to the decision of the House of
Lords in the case of Seaham Harbour Dock Co. v. Crook, (1931) 16 TC
333. In that case the Harbour Dock Co. had applied for grants from the
Unemployment Grants Committee from funds appropriated by Parliament. The said
grants were paid as the work progressed. The payments were made several times
for some years. The Dock Co. had undertaken the work of extension of its
docks. The extended dock was for relieving the unemployment. The main purpose
was relief from unemployment. Therefore, the House of Lords held that the
financial assistance given to the company for dock extension cannot be
regarded as a trade receipt.

 

The Supreme Court observed that the aforesaid judgment of
the House of Lords showed that the source of payment or the form in which the
subsidy is paid or the mechanism through which it is paid is immaterial and
what is relevant is the purpose for payment of assistance.

 

Applying the above tests to the facts of the present case
and keeping in mind the object behind the payment of the incentive subsidy,
the Supreme Court was satisfied that payment received by the assessee under
the scheme was not in the course of a trade, but was of capital nature.

Interest — Waiver of interest u/s.220(2) — Case of genuine hardship — Merely because a person has large assets could not per se lead to the conclusion that he would never be in difficulty as he can sell those assets and pay the amount of interest levied —

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  1. Interest — Waiver of interest u/s.220(2) — Case of genuine
    hardship — Merely because a person has large assets could not per se
    lead to the conclusion that he would never be in difficulty as he can sell
    those assets and pay the amount of interest levied — When a request has been
    made to dispose of the seized assets and appropriate proceeds towards taxes,
    why the request was not acceded to should be gone into by the Commissioner.



[B. M. Malani v. CIT, (2008) 306 ITR 196 (SC)]

 

The appellant had been carrying on money-lending business
and trading in shares and securities. On or about September 4, 1994, a raid
was conducted in his residential premises by the authorities in exercise of
their powers u/s.132 of the Income-tax Act, 1961 (for short, ‘the Act’).
Amongst others, shares worth market value of Rs.61.38 lakhs and a demand draft
worth Rs.10 lakhs in the name of PAN Clothing Company Limited were seized. By
a letter dated December 15, 1994, a declaration was made by the appellant in
terms of Ss.(4) of S. 132 of the Act, by reason whereof he opted to pay taxes
from out of the seized shares and securities stating that the shares be
expeditiously disposed of and the sale proceeds therefrom be appropriated
towards taxes. The said request of the appellant was not acceded to.

 

The Income-tax Department demanded and recovered a sum of
Rs.40 lakhs in between the period January and March, 1995, for the A.Y.
1991-92 to 1994-95.

 

The appellant filed an application in terms of Ss.(1) of S.
245C before the Settlement Commission on January 2, 1996, whereupon an order
was passed by the Settlement Commission on December 2, 1999. The demand draft
drawn in the name of PAN Clothing Company Limited worth Rs.10 lakhs which was
seized during the course of search was encashed by the Income-tax Department
in July, 2000, after the same was got revalidated.

 

By an order dated March 8, 2002, the Income-tax Officer,
Ward-10(1), Hyderabad, levied interest for a sum of Rs.31,41,106 u/s.220(2) of
the Act for the A.Ys. 1990-91 to 1995-96.

 

The appellant thereafter filed an application for waiver of
interest on diverse dates, i.e., April 3, 2002, May 14, 2002, and
September 16, 2002. The same was rejected by the Commissioner of Income-tax by
reason of an order dated November 26, 2002, opining that the appellant did not
satisfy all the three conditions which were required for allowing a waiver
petition. The High Court dismissed the writ petition filed by the appellant.
On an appeal to the Supreme Court, it was held that for interpretation of the
aforementioned provision, the principle of purposive construction should be
resorted to. Levy of interest although is statutory in nature, inter alia is
for recompensating the Revenue from loss suffered by non-deposit of tax by the
assessee within the time specified therefor. The said principle should also be
applied for the purpose of determining as to whether any hardship had been
caused or not. A genuine hardship would, inter alia, mean a genuine
difficulty. That per se would not lead to a conclusion that a person
having large assets would never be in difficulty as he can sell those assets
and pay the amount of interest levied.

 

The Supreme Court further held that the Commissioner has
the discretion not to accede to the request of the assessee, but that
discretion must be judiciously exercised. He has to arrive at a satisfaction
that the three conditions laid down therein have been fulfilled before passing
an order waiving interest.

 

According to the Supreme Court, compulsion to pay any
unjust dues per se would cause hardship. But a question, however, would
further arise as to whether the default in payment of the amount was due to
circumstances beyond the control of the assessee.

 

The Supreme Court was of the view that, unfortunately, this
aspect of the matter had not been considered by the learned Commissioner and
the High Court in its proper perspective. The Supreme Court observed that the
Department had taken the plea that unless the amount of tax due was
ascertainable, the securities could not have been sold and the demand draft
could not have been encashed. The Supreme Court held that the same logic would
apply to the case of the assessee in regard to levy of interest also. It is
one thing to say that the levy of interest on the ground of non-payment of
correct amount of tax by itself can be a ground for non-acceding to the
request of the assessee as the levy is a statutory one, but it is another
thing to say that the said factor shall not be taken into consideration at all
for the purpose of exercise of the discretionary jurisdiction on the part of
the Commissioner. The appellant volunteered that the securities be sold. Why
the said request of the appellant could not be acceded to has not been
explained.

 

The Supreme Court observed that as the offer was voluntary,
the authorities of the Department subject to any statutory interdict could
have considered the request of the appellant. It was probably in the interest
of the Revenue itself to realise its dues. Whether this could be done in law
or not has not been gone into. The same ground, however, was not available to
the appellant in respect of the demand draft, as in relation thereto no such
request was made.

 

The Supreme Court was of the opinion that interests of
justice would be sub-served if the impugned judgment was set aside and the
matter was remitted to the Commissioner of Income-tax for consideration of the
matter afresh. The appeal was allowed accordingly.

Substantial questions of law — Whether the freight paid by the assessee (AOP) to truck owners who in turn are members of the said AOP is subject to TDS u/s.194C(2) of the Act, is a substantial question of law.

New Page 1

  1. Substantial questions of law —
    Whether the freight paid by the assessee (AOP) to truck owners who in turn are
    members of the said AOP is subject to TDS u/s.194C(2) of the Act, is a
    substantial question of law.

[CIT v. Sirmour Truck
Operators Union (No. 1), (2009) 313 ITR 26 (SC)]

[CIT v. Sirmour Truck
Operators Union (No. 2), (2009) 313 ITR 27 (SC)]

M/s. Gujarat Ambuja Cements
Ltd. entered into a contract with M/s. Sirmour Trucks Operators Union, a
society, consisting of truck operators as its members. The question which
arose before the High Court was whether the freight paid by the assessee (AOP)
to truck owners, who in turn are members of the said AOP, is subject to TDS
u/s.194C(2) of the Act. According to the Supreme Court, the afore-stated
question was a substantial question of law and the High Court ought to have
decided the said question and ought not to have dismissed the appeals
summarily. The Supreme Court therefore remitted the matter to the High Court
for consideration in accordance with the law.

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Writ petition — Under Income-tax Act, the unit of assessment is a ‘year’ and hence it is not open to a court to direct by an omnibus order that all subsequent years are connected years and that income be treated in same manner for all the years.

New Page 1

  1. Writ petition — Under
    Income-tax Act, the unit of assessment is a ‘year’ and hence it is not open to
    a court to direct by an omnibus order that all subsequent years are connected
    years and that income be treated in same manner for all the years.


[Dy. CIT v. Divya
Investment P. Ltd., (2004) 313 ITR 363 (SC)]

 

The assessee, a private
limited company, carried on the business, inter alia, of hire-purchase.
The assessee took on lease a land with existing structure. The lease deed was
entered into on October 30, 1986. The lease was for ten years. The assessee
demolished the structure and constructed a multi-storeyed building which was
let out to Canara Bank and others. The assessee received hiring charges and
maintenance charges from the lessees. Thereafter, the respondent filed its
return for the A.Y. 1997-98. The Assessing Officer held that it was an income
from house property and not from business as claimed by the assessee in its
return. The assessment order was confirmed by the Commissioner of Income-tax
(Appeals) and cases for earlier assessment years from 1992 to 2000 were
ordered to be reopened by issuance of notice u/s.148 of the Income-tax Act.

Aggrieved by the decision of
the Commissioner of Income-tax (Appeals), the matter was carried in appeal to
the Tribunal. The Tribunal held that hire charges received by the assessee
were liable to be assessed as business income and not as income from property.

Against the notices issued
u/s.148 reopening the assessments, the assessee filed a separate writ petition
for each of the assessment years in which reopening was ordered. The High
Court held in all the writ petitions that the income should be treated as
business income and not as income from house property as held by the Tribunal.
The decision of the High Court was based on the fact that for one assessment
year of the assessee (viz. 1997-98), the Tribunal had held that income
should be treated as income from business and not as income from house
property and so long as this view of the Tribunal was not reversed, all the
subordinate authorities were bound by this decision.

On an appeal the Supreme Court
held that it was not open to the High Court to direct by an omnibus order that
all subsequent years were connected years and that income be treated only as
business income. Under the Income-tax Act, the unit of assessment is a ‘year’.
According to the Supreme Court the parties should have been relegated to move
the Tribunal by filing an appeal u/s.253(1) and it was not open to the High
Court to entertain the writ petitions.

The Supreme Court, however,
clarified that in this case there were two separate proceedings involved,
viz., the order of the Commissioner of Income-tax (Appeals) plus
proceedings u/s.148. Unfortunately, all proceedings were clubbed in the writ
petitions. The exact status of those proceedings was not known. If the
assessee objected to the reopening of assessment, then, it was required to
file revised returns. The Supreme Court refrained from expressing any opinion
in that regard. Similarly, if the decision of the Commissioner of Income-tax
(Appeals) was sought to be challenged for a given year, then, the assessee
ought to have filed appeals u/s. 253(1) before the Tribunal. However, since
the writ petitions were pending in the High Court, the Supreme Court directed
that if appeals were required to be filed, then they shall be filed within
four weeks from the date of the order in which they shall not be dismissed on
the ground of delay.


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Substantial question of law — While allowing the deduction of expenditure, nature of such expenditure is required to be examined — Question of nature of expenses is a substantial question of law.

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  1. Substantial question of law —
    While allowing the deduction of expenditure, nature of such expenditure is
    required to be examined — Question of nature of expenses is a substantial
    question of law.

[CIT v. Oswal Agro Mills
Ltd., (2009) 313 ITR 24 (SC)]

The Supreme Court observed
that in this case, the substantial question of law which arose before the High
Court u/s.260A was as follows :

“Whether the assessee is
entitled to deduction of Rs.1,16,89,327 incurred as ‘issue management
expenses’ ?”

On reading the judgments of
the Tribunal and the High Court, the Supreme Court found that the assessee had
succeeded only on the basis of ‘rule of consistency’. According to the Supreme
Court, the High Court should have examined the nature of the
said expenses, namely, ‘issue management expenses’. The Supreme Court was of
the view that substantial question of law did arise for determination.

Consequently, the Supreme
Court set aside the impugned judgment of the High Court and remitted the
matter to the High Court for fresh consideration in accordance with law.

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Penalty — Concealment of income — Penalty can be levied u/s.271(1)(c) even in a case where positive income is reduced to nil after set off of carried forward losses of earlier years.

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  1. Penalty — Concealment of
    income — Penalty can be levied u/s.271(1)(c) even in a case where positive
    income is reduced to nil after set off of carried forward losses of earlier
    years.

[CIT v. R.M.P. Plasto P.
Ltd., (2009) 313 ITR 397 (SC)]

The question that came up for
consideration before the High Court was whether the Appellate Tribunal was
right in law and on facts in cancelling the penalty levied u/s.271(1)(c) of
the Act on the ground that there was loss assessed in the year under
consideration, without appreciating the fact that there was positive income
which was reduced to nil only after allowing set off of carried forward losses
of earlier years. The High Court dismissed the appeal following its decision
in the case of CIT v. Avon Flours P. Ltd., (2009) 313 ITR 400 (Guj.).

On appeal, the Supreme Court
allowed the appeal in view of the judgment of the larger Bench in CIT v.
Gold Coin Health Food P. Ltd., (2008) 304 ITR 308 (SC).

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Export business — Deduction u/s.80HHC — ‘Rights’ of movies for telecasting for a period of five year would fall in the category of articles of trade and commerce, hence merchandise — So far as films are concerned the word ‘lease’ is included in the meanin

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  1. Export business — Deduction
    u/s.80HHC — ‘Rights’ of movies for telecasting for a period of five year would
    fall in the category of articles of trade and commerce, hence merchandise — So
    far as films are concerned the word ‘lease’ is included in the meaning of the
    word ‘sale’.

[CIT v. B. Suresh,
(2009) 313 ITR 149 (SC)]

During the relevant A.Y.
1993-94, the assessee, B. Suresh, transferred feature film rights for
exploitation outside India and earned income in foreign exchange. The assessee
claimed deduction u/s.80HHC in respect of the said receipts. The Assessing
Officer held that the assessee was not entitled to deduction u/s.80HHC,
inter alia, on the ground that the export was not of merchandise or goods
as contemplated u/s.80HHC, but was merely an export of ‘rights’ in the film.
This decision of the AO was overruled by the Commissioner of Income-tax
(Appeals). When the matter came before the Tribunal at the instance of the
Department, there was already a judgment of the Bombay High in the case of
Abdulgafar A. Nadiadwala v. ACIT, (2004) 267 ITR 488. Following the said
decision, the Tribunal and the High Court held that the assessee was entitled
to deduction u/s.80HHC. On an appeal by the Department, the assessee inter
alia invited attention of the Supreme Court to the scheme of S. 80HHC to
point out that the word ‘sale’ would also include ‘lease’ as indicated in Rule
9A(7) which states that for the purposes of Rule 9A, the ‘sale’ of the rights
of exhibition of feature films would include the ‘lease’ of such rights.
Similarly, under Rule 9B(6), it has been, inter alia, provided that
‘Sale’ of rights of exhibition of a feature film would include ‘lease’ of such
rights.

The Supreme Court held that
the basic requirement of S. 80HHC is earning in foreign exchange and retention
of profits for export business. Profits are embedded in the ‘income’ earned.
Earning of income depends on sale of goods and services. Today the difference
between the two is getting blurred with globalisation and cross-border
transaction. Today with technological advancement one has to change the
thinking regarding concepts like goods, merchandise and articles. In the
instant case the assessee had bought rights of various decoders and had
recorded movies on beta-cam tapes which were transferred as telecasting rights
to Star T.V. for five years (it has a limited life). Hence, such ‘rights’
would certainly fall in the category of articles of trade and commerce, hence,
merchandise. On the question as to whether transfer of the said rights by way
of lease would attract S. 80HHC, the Supreme Court found merit in the
contention that under Rule 9A and 9B, the word ‘lease’ is included in the
meaning of the word ‘sale’. In conclusion the Supreme Court observed that
there was no infirmity in the judgment of the Bombay High Court in the case of
Abdulgafar A. Nadiadwala (supra).

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Exemption — S. 10(5) — Leave travel concession/Conveyance allowance — For the purpose of S. 192, employer need not collect and examine the supporting evidence to the deduction submitted by the employees.

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  1. Exemption — S. 10(5) — Leave
    travel concession/Conveyance allowance — For the purpose of S. 192, employer
    need not collect and examine the supporting evidence to the deduction
    submitted by the employees.

[CIT v. Larsen and Toubro
Ltd., (2009) 313 ITR 1 (SC)]

A short question which arose
for determination in the civil appeal(s) before the Supreme Court was, whether
the assessee(s) was/were under statutory obligation under the Income-tax Act,
1961, and/or the Rule to collect evidence to show that its employee(s) had
actually utilised the amount(s) paid towards leave travel concession(s)/conveyance
allowance.

The Supreme Court held that
the beneficiary of exemption u/s.10(5) was an individual employee and there is
no circular of the Central Board of Direct Taxes (CBDT) requiring the employer
u/s.192 to collect and examine the supporting evidence to the declaration to
be submitted by an employee(s).

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Appeal : ITAT : Reference to Third Member : S. 255(4) does not empower the President/Third Member to go beyond the reference and to enlarge, restrict and modify and/or formulate any question of law on his own on the difference of opinion referred to by t

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II. Reported :



35. Appeal : ITAT : Reference to Third Member : S. 255(4) of
Income-tax Act, 1961 : A.Y. 1990-91 : S. 155(4) does not empower the
President/Third Member to go beyond the reference and to enlarge, restrict and
modify and/or formulate any question of law on his own on the difference of
opinion referred to by the Members of Tribunal.


[Dynavision v. ITAT, 217 CTR 153 (Mad.) :

In this case, when the appeal was heard by the Tribunal,
the Accountant Member and the Judicial Members differed in their opinions.
While referring the matter to the President for constituting Third Member
Bench u/s.255(4) of the Income-tax Act, 1961, there was no unanimity between
them in identifying the point of difference. The President, with a view to
identify the point of difference, reframed the questions and decided the
appeal as Third Member.

 

The assessee filed writ petition challenging the order of
the Third Member. The Madras High Court quashed the order of the Third Member
and held as under :

“(i) From a reading of S. 255(4), it is clear that the
order of reference to the Third Member shall contain the difference of
opinion between the Members of the Bench. The President or the Third Member
has no right to go beyond the scope of reference and they have to consider
only the difference of opinion stated by the Members of the Bench. S. 255(4)
does not vest such power with the President or the Third Member. They have
also no right to formulate the question on their own. Framing the question
on their own goes beyond the jurisdiction.

(ii) The Third Member must confine himself to the order
of reference. Therefore, he has no right to enlarge, restrict and modify
and/or formulate any question of law on his own on the difference of opinion
referred to by the Members of the Tribunal. In this case, the JM and the AM
had the difference of opinion and formulated the questions. The President
had no right to go beyond the scope of reference. For the foregoing reasons
and in the interest of justice, the order of the Third Member is set aside
with a direction to rehear only on the difference of opinion referred to by
the Members of the Division Bench and consider and pass orders in accordance
with law.”

 


 


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Appeal to CIT(A) : Scope of ‘tax’ u/s.249(4) : ‘Tax’ does not include interest.

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II. Reported :

34 Appeal to CIT(A) : Condition precedent :
Scope of ‘tax’ u/s.249(4) of Income-tax Act, 1961 : ‘Tax’ does not include
interest.

[CIT v. Manojkumar Beriwal, 217 CTR 407 (Bom.) :

In this case while filing appeal before the CIT(A), the
assessee had paid disputed tax, but the amount paid was not sufficient to cover
the interest u/s.234B and u/s.234C of the Act. The CIT(A) dismissed the appeal
filed by the assessee on the ground that the condition of payment of tax
u/s.249(4) of the Income-tax Act, 1961 is not satisfied. He was of the view that
tax u/s.249(4) includes interest u/s.234B and u/s.234C of the Act. The Tribunal
allowed the assessee’s appeal and held that for the purposes of S. 249(4), the
deposit of tax which is a condition precedent, does not include interest
u/s.234B and u/s.234C of the Act.

 

On appeal filed by the Revenue, the Bombay High Court upheld
the decision of the Tribunal and held as under :

“(i) It is well settled that when the Legislature seeks to
make a law denying a remedy on failure to comply with deposit, the Courts
would save the remedy, if possible by the interpretative process. Further, in
taxing statute, if a view can be taken in favour of an assessee, that view is
ordinarily preferred.

(ii) On the literal reading of S. 249(4), the language used
by the Legislature is ‘has paid tax dues’. The expression tax has been defined
in S. 2(43). Tax as per the definition does not include interest which has
been independently referred to u/s.2(28A). When the Legislature itself has
used two different expressions and defined separately, then whilst considering
the language of a Section, the Courts are bound to look at the definitions in
the legislation for the purpose of interpreting and construing the expressions
and words under the Act. The object being to avoid conflict and have a
harmonious interpretation, unless the context otherwise requires.

(iii) In these circumstances, the expression ‘tax’ does not
include interest for the purpose of s. 249(4).”

 


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Compulsory purchase of property : Chapter XX-A/Chapter XX-C : Agreement dated 15-9-1986 : Chapter XX-A applies and not Chapter XX-C

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I. Unreported :



33 Compulsory purchase of property : Chapter
XX-A/Chapter XX-C of Income-tax Act, 1961 : Agreement dated 15-9-1986 for
purchase of bungalow to be constructed : Competent Authority held that it is not
a fit case for acquiring under Chapter XX-A : Appropriate Authority passed order
of purchase under Chapter XX-C : Not valid : Chapter XX-A applies and not
Chapter XX-C.

[Mr. Jaipal Jain and Ors. v. Appropriate Authority and
Ors. (Bom.) : W. P. 680 of 1993; Dated 1-12-2008 : (Not reported)]

Under an agreement dated 15-9-1986, the petitioners had
agreed to purchase from the builder a residential bungalow to be constructed. On
13-10-1986 the petitioners filed a declaration in Form 37EE seeking NOC from the
Competent Authority under Chapter XXA of the Income-tax Act, 1961. By an order
dated 30-12-1992 passed u/s.269UF(7) of the Act, the Competent Authority held
that the property in question is not a fit case for acquiring under Chapter XX-A
of the Act. On the other hand, on a declaration filed in Form No. 37-I by the
vendors, the Appropriate Authority passed an order of purchase u/s.269UD(1) of
Chapter XX-C of the Act on 26-12-1986. The Bombay High Court set aside the said
order on 16-12-1992 with a direction to pass a fresh order in accordance with
law. The Appropriate Authority once again passed an order u/s. 269UD(1) on
24-2-1993, directing purchase of the property.

 

On a writ petition filed by the petitioner challenging the
validity of the order, the Bombay High Court quashed the said order dated
24-2-1993 and held as under :

“(i) In the case of Hiten R. Mehta v. Union of India,
(2008) 167 Taxman 338 (Bom.), this Court in a similar case held that the
provisions of Chapter XX-A would apply to the transactions entered into prior
to 1-10-1986 relating to transfer of immovable property as also transactions
where a person acquires any right in or with respect to any building or part
of a building by becoming a member or acquiring shares in a cooperative
society.

(ii) In the present case, the agreement in question was
entered into on 15-9-1986 i.e., prior to the introduction of Chapter
XX-C of the Act. Thus the issue raised in this petition is squarely covered by
the judgment of this Court in the case of Hiten R. Mehta (supra)
against the Revenue and, therefore, the impugned order passed under Chapter
XX-C of the Act cannot be sustained.”



 

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Business deduction : Bad debts : S. 36(1)(vii) : After amendment w.e.f. 1-4-1989 writing off of bad debt in the accounts is sufficient for allowing deduction — Not necessary to prove that debt has become bad

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I. Unreported :

32 Business deduction : Bad debts : S.
36(1)(vii) of Income-tax Act, 1961 : After amendment w.e.f. 1-4-1989 writing off
of bad debt in account is sufficient for allowing deduction. It is not necessary
to prove that debt has become bad.

[CIT v. M/s. Star Chemicals (Bombay) P. Ltd. (Bom.);
ITAL No. 1915 of 2007; Dated 27-2-2008]

The following question was raised before the High Court in
the appeal filed by the Revenue u/s.260A of the Income-tax Act, 1961.

“Whether on the facts and in the circumstances of the case
and in law, the Tribunal is right in confirming the order of CIT(A) in
deleting the disallowance of Rs.79,27,211 on account of bad debt despite the
debt has not become bad ?”

 


The Bombay High Court held as under :

“The issue arises from the amendment to S. 36(1)(vii) of
the Income-tax Act. Subsequent to the amendment the Board has issued Circular
551, dated 23-1-1990. The issue pertained to bad debt in para 6.6. The
relevant portion of the direction reads as under :

“In order to eliminate the disputes in the matter of
determining the year in which a bad debt can be allowed and also to
rationalise the provisions, the Amending Act, 1987 has amended clause (vii) of
Ss.(1) and clause (i) of Ss.(2) of the Section to provide that the claim for
bad debt will be allowed in the year in which such a bad debt has been written
off as irrecoverable in the accounts of the assessee.”

 

It is thus clear from the reading of the Section itself and
the Circular that if the assessee has written off the debt as bad debt, that
would satisfy the purpose of the Section. Considering the law as stated in so
far as the view taken by the Tribunal cannot be faulted.”

 


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TDS : Fees for technical services : Ss.9(1)(vii) & 195 : Payment for use of Internet bandwidth is not fees for technical services : No obligation to deduct tax at source from payment.

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II. Reported :


43. TDS : Fees for technical services : S. 9(1)(vii) and S.
195 of Income-tax Act, 1961 : A.Y. 2001-02 : Assessee using Internet bandwidth
of US party T and providing access to its subscribers : Payment for use of
Internet bandwidth is not fees for technical services : No obligation to deduct
tax at source from payment.



[CIT v. Estel Communications (P) Ltd., 217 CTR 102
(Del.)]

The assessee was using Internet bandwidth of US party,
Teleglobe, for providing access to its subscribers. For the services
rendered by the assessee to the subscribers in India, it levies a charge and
out of this, some amount is paid to the US party. The Assessing Officer
invoked the provisions of S. 9(1)(i) and S. 9(1)(vii) of the Income-tax Act,
1961 and held that the assessee is liable to deduct tax at source from the
payments made to the US party. The Tribunal held that the assessee is not
liable to deduct tax at source.

On appeal by the Revenue, the Delhi High Court upheld the
decision of the Tribunal and held as under :

“(i) The Tribunal considered the agreement that had been
entered into by the assessee with Teleglobe and came to the conclusion that
there was no privity of contract between the customers of the assessee and
Teleglobe. In fact, the assessee was merely paying for an Internet bandwidth
to Teleglobe and then selling it to the customers.

(ii) The use of Internet facility may require
sophisticated equipment, but that does not mean that technical services were
rendered by Teleglobe to the assessee. It was a simple case of purchase of
Internet band width by the assessee from Teleglobe. No technical services
were rendered by Teleglobe to the assessee.

(iii) The Tribunal has rightly dismissed the appeal after taking into
consideration the agreement between the assessee and Teleglobe and the
nature of services provided by Teleglobe to the assessee.”


 

 


 

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Speculative loss/business loss : S. 28(i) & S. 43(5) : Transaction of purchase and sale ultimately settled by actual delivery : Not speculative transaction : Loss arising is business loss and not speculative loss.

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II. Reported :


42 Speculative loss/business loss : S. 28(i)
and S. 43(5) of Income-tax Act, 1961 : A.Y. 1990-91 : Transaction of purchase
and sale ultimately settled by actual delivery : Not speculative transaction:
loss arising is business loss and not speculative loss.


[Sripal Satyapal v. ITO, 217 CTR 337 (Raj.)]

The assessee is a cotton merchant and carries on business
of purchase and sale of cotton bales. In the previous year relevant to A.Y.
1990-91 the appellant purchased certain cotton bales from one R through the
commission agent J, but however did not take delivery. He subsequently sold
the said goods to Os Co. through commission agent Om. The ultimate purchaser
Os Co. took delivery of the goods from R. The Assessing Officer treated the
loss arising out of the transaction as speculative loss on the ground that the
appellant had not taken delivery of the goods. The Tribunal upheld the
decision of the Assessing Officer.

 

In appeal the following question was raised before the
Rajasthan High Court :

“Whether the Tribunal was justified in disallowing the
claim for set-off of business loss of Rs.2,54,068 in the hands of the
appellant by applying S. 43(5) of the IT Act, 1961 and treating the same as
speculative loss merely for the reason that transportation charges were not
shown to be paid by the appellant ?”

 


The Rajasthan High Court reversed the decision of the
Tribunal and held as under :

“The fact of taking physical delivery of the goods by the
assessee is not the test for determining the speculative transaction in
terms of S. 43(5), but the test is settlement of the transaction entered
into by the assessee or on his behalf otherwise than by actual delivery of
the commodity. Even though the assessee itself or its agent did not obtain
actual delivery of the goods, but the goods having been specifically
identified at the godown and actual delivery to purchaser from the assessee
having been effected by transport of goods directly from the godown,
transaction entered into by the assessee could not be termed as speculative
transaction.”




 

 


 

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Reassessment : Scope : S. 147 : Addition in respect of items other than the one on which notice is given : Permissible only when the AO assesses any income with respect to which he had ‘reason to believe’ to be so : Otherwise reassessment proceedings beco

New Page 1

II. Reported :


41 Reassessment : Scope : S. 147 of
Income-tax Act, 1961 : Addition in respect of items other than one on which
notice is given : Permissible only when AO assesses any income with respect to
which he had ‘reason to believe’ to be so : Otherwise reassessment proceedings
become invalid.

[CIT v. Shri Ram Singh, 217 CTR 345 (Raj.)]

In the course of search of some business establishment, a
diary was found, which showed some entry regarding purchase of plot of land by
the assessee for a consideration of Rs.1,66,000, while in the agreement it was
shown to have been purchased for Rs.45,000. On this basis the Assessing Officer
issued notice u/s.148. In the course of the reassessment proceedings the
Assessing Officer was satisfied with the source of investment in land and no
addition was made on that count. However, in the course of reassessment
proceedings the Assessing Officer found that during the relevant year the
assessee had made deposits of Rs.1,65,000 cash, for which there was no
explanation. He therefore made an addition of Rs.1,65,000 and completed the
reassessment proceedings. The Tribunal found that the Assessing Officer has
accepted the investment in the plot of land which was the very basis of
reopening. The Tribunal held that when the very base of the reopening goes, the
reason for reopening also goes. The Tribunal, therefore, held that the action
taken by the Assessing Officer is illegal and accordingly quashed the
reassessment order.

 

On appeal by the Revenue, the Rajasthan High Court upheld the
decision of the Tribunal and held as under :


“Once the Assessing Officer came to the conclusion that the
income with respect to which he had entertained ‘reason to believe’ to have
escaped assessment, was found to have been explained, his jurisdiction came to
a stop at that. He did not continue to possess jurisdiction to put to tax any
other income, which subsequently came to his notice in the course of
reassessment proceedings, which was found by him to have escaped assessment.”

New industrial undertaking in backward area : Deduction u/s.80HH : A.Y. 1999-00 : Interest received for belated settlement of bills by sundry debtors : Directly relatable to business of assessee : Is profit and gains derived from business and considered f

New Page 1

II. Reported :


40 New industrial undertaking in backward
area : Deduction u/s.80HH of Income-tax Act, 1961 : A.Y. 1999-00 : Interest
received for belated settlement of bills by sundry debtors : Directly relatable
to business of assessee : To be included as profit and gains derived from
business and considered for deduction u/s.80HH.

[CIT v. Bhansali Engineering Polymers Ltd., 306 ITR
194 (Bom.)]

The assessee had an industrial undertaking in backward area,
eligible for deduction u/s.80HH of the Income-tax Act, 1961. For the A.Y.
1999-00, the assessee included the interest received for belated settlement of
bills by sundry debtors for computing deduction u/s.80HH. The Assessing Officer
excluded the amount of interest. The Tribunal allowed the claim of the assessee.

 

On appeal by the Revenue, the Bombay High Court upheld the
decision of the Tribunal and held as under :

“The Tribunal was right in holding that the interest
received on belated payments from sundry debtors to whom the industrial unit
of the assessee had sold goods could be treated as interest income derived
from the industrial undertaking, even though the assessee had realised income
from other sources and in directing the Assessing Officer to recompute the
deduction u/s.80HH.”

Deemed dividend : S. 2(22)(e) : Partners of assessee firm shareholders of company : Company advanced loan to firm : Loan not to be treated as deemed dividend in the hands of the firm

New Page 1

II. Reported :



 


38 Deemed dividend : S. 2(22)(e) of
Income-tax Act, 1961 : Partners of assessee firm shareholders of company :
Assessee firm not a shareholder of company : Company advanced loan to firm :
Loan not to be treated as deemed dividend in hands of firm.

[CIT v. Hotel Hilltop, 217 CTR 527 (Raj.)]

In the scrutiny assessment u/s.143(3) of the Income-tax Act,
the Assessing Officer made an addition of Rs.10,00,000 as deemed dividend
u/s.2(22)(e), being advance received from M/s. Hilltop Palace Hotels (P) Ltd. in
which the two partners of the assessee firm held 48.33% of the shares. CIT(A)
deleted the addition holding that the assessee firm is not a shareholder of the
company, and therefore, the amount of Rs.10,00,000 cannot be assessed to tax in
the hands of the assessee firm. The Tribunal dismissed the appeal filed by the
Revenue.

 

On appeal by the Revenue the Rajasthan High Court upheld the
decision of the Tribunal and held as under :

“(i) The important aspect, being the requirement of S.
2(22)(e) is, that “the payment may be made to any concern, in which such
shareholder is a member or the partner, and in which he has substantial
interest, or any payment by any such company, on behalf, or for the individual
benefit of any such shareholder . . .” Thus, the substance of the requirement
is, that the payment should be made on behalf, or for the individual benefit
of any such shareholder. Obviously, the provision is intended to attract the
liability of tax on the person, on whose behalf, or for whose individual
benefit, the amount is paid by the company, whether to the shareholder, or to
the concerned firm, in which event, it would fall within the expression
‘deemed dividend’.

(ii) Obviously, income from dividend is taxable as income
from other sources u/s.56, and in the very nature of things, the income has to
be of the person earning the income. The assessee in the instant case is not
shown to be one of the persons, being shareholder. Of course the two
individuals being ‘R’ and ‘D’ are the common persons, holding more than
requisite amount of shareholding and are having requisite interest in the
firm. But then, thereby the deemed dividend would not be deemed dividend in
the hands of the firm, rather it would obviously be deemed dividend in the
hands of the individuals, on whose behalf, or for whose individual benefit,
being such shareholder, the amount is paid by the company to the concern.

(iii) Thus the significant requirement of S. 2(22)(e) is
not shown to exist. The liability of tax as deemed dividend could be attracted
in the hands of the individuals, being the shareholders, and not in the hands
of the firm.”

 


 

levitra

Income or capital receipt : Non-compete fees : S. 10(3) and S. 45  : Payment for loss of office as director with freedom to carry on other employment without involving in software develop- ment : Is capital receipt not liable to tax.

New Page 1

II. Reported :


39. Income or capital receipt : Non-compete fees : S. 10(3)
and S. 45 of Income-tax Act, 1961 : A.Y. 2000-01 : Payment for loss of office as
director with freedom to carry on other employment without involving in software
development: Is capital receipt not liable to tax.


[Rohitasava Chand v. CIT, 306 ITR 242 (Del.)]

The assessee, a shareholder and director of a company
entered into non-compete agreements with a foreign company and received
certain sums under the agreements from periods relevant to A.Ys. 1998-99 to
2000-01. During the currency of the non-compete agreements, the assessee was
restrained from soliciting, interfering, engaging in or endeavouring to carry
on any activity, including supply of services or goods concerning software
development. For the A.Y. 1998-99 the Assessing Officer accepted the claim of
the assessee that the receipt is a capital receipt not liable to tax. However,
for the A.Y. 2000-01 the Assessing Officer rejected the claim of the assessee
and included the amount in the income of the assessee. The Tribunal upheld the
addition.

 

On appeal by the assessee, the Delhi High Court reversed
the decision of the Tribunal and held as under :

 


“(i) Where an amount is received by way of compensation
under a restrictive covenant or under a non-compete agreement, it would
amount to a capital receipt in the hands of the recipient, but a lot would
depend on the agreement entered into between the parties.

(ii) The non-compete agreement incorporated a restrictive
covenant on the right of the assessee to carry on his activity of
development of software. While it might not alter the structure of his
activity, in the sense that he could carry on the same activity in an
organisation in which he had a small stake, it certainly impaired the
carrying on of his activity. To that extent it was a loss of a source of
income for him and it was of an enduring nature, as contrasted with a
transitory or ephemeral loss. The covenant was an independent obligation
undertaken by the assessee not to compete with the new agents in the same
field for a specified period, which came into operation only after the
agency was terminated and was wholly unconnected with the assessee’s agency
termination. Therefore, that part of the compensation attributable to the
restrictive covenant was a capital receipt not assessable to tax.

(iii) The non-compete agreement was independent of the
first agreement whereby the assessee agreed to transfer his shares to the
foreign company. The receipt in the hands of the assessee was a capital
receipt inasmuch as it denied his profit making capabilities.”

Capital gains : Exemption u/s.54F : Construction of new house : If the assessee has invested the net consideration before the specified period, exemption cannot be denied on ground that construction not completed within that period.

New Page 1

II. Reported :


37 Capital gains : Exemption u/s.54F of
Income-tax Act, 1961 : A.Y. 2001-02 : Construction of new house : Requirement is
that assessee has to construct a residential house within a period of three
years after date of transfer : If assessee has invested net consideration before
specified period, exemption cannot be denied on ground that construction is not
completed within that period.

[CIT v. Sardarmal Kothari, 217 CTR 414 (Mad.)]

For the A.Y. 2001-02, the Assessing Officer disallowed the
claim of the assessee for exemption of the capital gain u/s.54F of the
Income-tax Act, 1961 on the ground that the construction of the new house was
not completed. The CIT(A) allowed the claim observing that the assessee had
invested the capital gain in the land and the construction was substantially
completed. The Tribunal upheld the decision of the CIT(A).

 

On appeal by the Revenue, the Madras High Court upheld the
decision of the Tribunal and held as under :

“(i) There is no dispute about the fact that the assessee
has invested the entire net consideration of sale of capital asset in the land
itself and subsequently the assessee has invested large sums of money in
construction of the house. The one and only ground on which the Assessing
Officer has non suited the assessee for the claim of exemption was that the
house has not been completed. There remains some more construction to be made.

(ii) The requirement of the provision is that the assessee,
within a period of three years after the date of transfer, has to construct a
residential house in order to become eligible for exemption. In the case on
hand, it is not in dispute that the assessee has purchased the land by
investing the capital gain and he has also constructed residential house.

(iii) On a reading of the Board Circular No. 667, dated
18-10-1993, relied on by the Revenue, we are of the view that the Circular
would not in any way advance the case of the Revenue to come to the conclusion
that in order to have the benefit u/s.54F of the Act, the construction should
have been completed.

(iv) The Tribunal has also taken note of its own earlier
orders, wherein the Tribunal has held that in order to get the benefit
u/s.54F, the assessee need not complete the construction of the house and
occupy the same. It is enough if the assessee establishes that the assessee
had invested the entire net consideration within the stipulated period. The
said view taken consistently by the Tribunal has been applied in this case
also.

(v) There is no material to entertain this appeal. The
appeal fails and the same is dismissed.”

 


 

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Business expenditure : Amortisation of preliminary expenses : S. 35D : Interest received on share application money : Can be set off against public issue expenses : Interest accrued not taxable.

New Page 1

II. Reported :


36 Business expenditure : Amortisation of
preliminary expenses : S. 35D of Income-tax Act, 1961 : Interest received on
share application money : Can be set off against public issue expenses :
Interest accrued not taxable.

[CIT v. Neha Proteins Ltd., 306 ITR 102 (Raj.)]

The assessee had claimed set-off of the interest earned on
the share application money against the public issue expenses which were to be
amortised in future under and in accordance with the provisions of S. 35D of the
Income-tax Act, 1961. The assessee had therefore claimed that the interest
income is not taxable. The Assessing Officer disallowed the claim for set-off
and added the interest amount to the income of the assessee. The Tribunal held
that the assessee was entitled to set-off of the interest against the public
issue expenses and deleted the addition.

 

The Rajasthan High Court dismissed the appeal filed by the
Revenue and held as under :

“(i) The amount of interest accruing on the share
application money could not be used by the assessee for any purpose whatever,
other than those mentioned in S. 73(3) and S. (3A) of the Companies Act, 1956,
and on the allotment of shares, the assessee was to take stock of things about
the expenditure incurred by it, being the public issue expenses, and the
interest accrued did reduce that expenditure and it was rightly required to be
adjusted against the expenditure, i.e., the assessee was entitled to
claim amortisation of the public issue expenses only on the figure so reduced,
after setting off, or adjusting.

(ii) The interest accrued on the share application money
lying with the bank under the mandate of S. 73 of the Companies Act was not
taxable as ‘Income from other sources’ and was required to be set off or
adjusted against the public issue expenses, so as to reduce the amount of
public issue expenses, for the purpose of enabling the assessee to claim
amortisation, under and in accordance with the provisions of S. 35D of the
Income-tax Act, 1961.

(iii) The assessee had not claimed adjustment of
this interest against other liability of the assessee to pay interest on the
borrowed money and it was nobody’s case that this was to be taxed as income
from “Profits and gains of business or profession”. It could not be said to be
a short-term deposit either.”

 


 

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Investment allowance — Whenever there is exchange fluctuation in any previous year, S. 43A(1) comes into play — the increase in liability should be taken as ‘actual cost’ within the meaning of section and extra benefit when liability is reduced must be ta

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  1. Investment allowance — Whenever there is exchange
    fluctuation in any previous year, S. 43A(1) comes into play — the increase in
    liability should be taken as ‘actual cost’ within the meaning of section and
    extra benefit when liability is reduced must be taxed under S. 41(1)(a).

[CIT v. Gujarat Siddhi Cement Ltd., (2008) 307 ITR
393 (SC)]

The respondent (hereinafter referred to as ‘the assessee’)
claimed increased amount as deduction as investment allowance on account of
increase in the cost of plant and machinery on account of exchange rate
fluctuation. The Assessing Officer disallowed the claim on the ground that the
plant and machinery in respect of which there has been increase were installed
in the earlier years.

Therefore, there is no scope for provision for investment
allowance in the year under assessment. It referred to the letter of the
assessee dated February 16, 1996, making such claim. The assessee preferred an
appeal before the Commissioner of Income-tax (Appeals). The disallowance made
by the Assessing Officer was upheld by the Commissioner of Income-tax
(Appeals) on the ground that no arguments were advanced and no factual details
were furnished regarding the alleged fluctuation on account of foreign
exchange rate.

The matter was carried in further appeal by the assessee
before the Tribunal, which allowed the claim, placing reliance on a decision
of the Gujarat High Court in CIT v. Gujarat State Fertilizers Co. Ltd.,
(2003) 259 ITR 526. The Revenue preferred an appeal u/s. 260A of the Act
before the High Court. By the impugned judgment the High Court upheld the view
of the Tribunal referring to the judgment of Gujarat Fertilizer’s case (2003)
259 ITR 526 (Guj.).

On an appeal, the Supreme Court referred to its judgment in
CIT v. Arvind Mills, (1992) 193 ITR 255 (SC) in which it was held that
where the provisions of Ss.(1) apply, the increased liability should be taken
as ‘actual cost’ within the meaning of S. 43A(1). All allowances including
development rebate or depreciation allowance or other types of deductions
referred to in the sub-section would therefore have to be based on such
adjusted actual cost. But then Ss.(2) intercedes to put in a caveat. It says
that the provisions of Ss.(1) should not be applied for purposes of
development rebate.

The Supreme Court further held that on a bare reading of
the provision, i.e., S. 43A(1), the position is clear that it relates
to the fluctuation in the previous year in question. If any extra benefit is
taken the same has to be taxed in the year when the liability is reduced as
provided in terms of S. 41(1)(a), Explanation 2. Therefore, whenever there is
fluctuation in any previous year, S. 43A(1) comes into play.

The Supreme Court noted that after the substitution by the
Finance Act, 2002, with effect from April, 1 2003, the position however was
quiet different. But in the instant case, the Commissioner of Income-tax
(Appeals) recorded a categorical finding that no argument was advanced and no
details were given. In the aforesaid background the Supreme Court felt that it
would be appropriate to grant opportunity to the assessee to establish the
factual position relating to fluctuation in the foreign exchange rate. For
that limited purpose, the Supreme Court remitted the matter to the Tribunal to
consider whether the assessee is justified in claiming deduction in the
background of S. 43A(1), as it stood then.

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Method of accounting — Before rejecting the method of accounting regularly followed by the assessee, the Assessing Officer should demonstrate that the method of accounting so followed results in underestimation of profits.

New Page 1

  1. Method of accounting — Before rejecting the method of
    accounting regularly followed by the assessee, the Assessing Officer should
    demonstrate that the method of accounting so followed results in
    underestimation of profits.

[CIT v. Realset Builders & Services Ltd., (2008) 307
ITR 202 (SC)]

The short point arising in the case before the Supreme
Court was : Whether income accrued to the assessee on registration of the sale
deed in favour of the third party (plot purchaser) or whether it accrued at
the time of execution of the tripartite agreement ? According to the
Department, income accrued on the date of execution of the tripartite
agreement when the assessee received full consideration of the plot and not in
the year in which the sale deed stood executed.

According to the assessee, since there was no transfer of
right, title and interest up to the date of execution of conveyance, income
did not accrue to the assessee till the date of conveyance and therefore,
there was no accrual of income at the time of execution of the tripartite
agreement(s) which took place during the A.Y. 1994-95.

The basic controversy is in which year the liability arose
— whether it arose during A.Y. 1994-95 or whether it accrued in the year when
conveyance stood executed.

Though the Supreme Court did not agree with the reasons
given by the High Court for dismissing the appeal in its impugned judgment,
(namely, that the Revenue had accepted two primary orders in the earlier
years), but since the Department had not gone into the method of accounting
followed by the assessee, it found no reason to interfere with the impugned
judgment.

The Supreme Court observed that in cases where the
Department wants to tax an assessee on the ground of the liability arising in
a particular year, it should always ascertain the method of accounting
followed by the assessee in the past and whether change in method of
accounting was warranted on the ground that profit is being underestimated
under the impugned method of accounting. If the Assessing Officer comes to the
conclusion that there is under-estimation of profits, he must give facts and
figures in that regard and demonstrate to the Court that the impugned method
of accounting adopted by the assessee results in underestimation of profits
and is therefore rejected. Otherwise, the presumption would be that the entire
exercise is revenue-neutral. In this case, that exercise had never been
undertaken. The Assessing Officer was required to demonstrate both the
methods, one adopted by the assessee and the other by the Department. In the
circumstance, there was no reason to interfere with the conclusion given by
the High Court and the Tribunal.

levitra

Gift Tax — Deemed Gift — Allotment of rights shares do not constitute transfer — Renunciation for inadequate consideration in a given case may attract S. 4(1)(a), but the Department has to proceed against the renouncer — Recipient of bonus shares from the

New Page 1

  1. Gift Tax — Deemed Gift — Allotment of rights shares do not
    constitute transfer — Renunciation for inadequate consideration in a given
    case may attract S. 4(1)(a), but the Department has to proceed against the
    renouncer — Recipient of bonus shares from the company cannot be called donee
    of shares.

[Khoday Distilleries Ltd. v. CIT and Another, (2008)
307 ITR 312 ((SC)]

On January 29, 1986, the appellant-company, on the other
shareholders not exercising the option given to them to take up the rights
shares issued by the appellant, allotted them to the seven investment
companies, who were the shareholders in the appellant-company. In all there
were twenty-seven shareholders. Twenty shareholders did not subscribe to the
rights issue and consequently the appellant-company allotted shares to the
remaining existing shareholders. The Assessing Officer held that the said
allotment by way of rights issue was without adequate consideration within the
meaning of S. 4(1)(a) of the Gift Tax Act, 1958 (1958 Act). He further held
that the modus operandi was an attempt to evade taxes, that it was a
colourable transaction and since the shares allotted were without adequate
consideration, there was a deemed gift u/s.4(1)(a) of the 1958 Act.
Accordingly, the difference between the value of the shares on yield basis and
the face value of Rs.10 at which the shares were allotted was sought to be
brought to tax under the said Section. Aggrieved by the decision of the
Assessing Officer, the appellant carried the matter in appeal to the
Commissioner of Income-tax (Appeals). It was held that the entire exercise
undertaken by the appellant was to evade payment of wealth-tax by the
individual shareholders of the appellant-company. This finding was given by
the Commissioner of Income-tax (Appeals) on the ground that rights shares were
allotted because 20 existing shareholders out of 27 shareholders of the
company did not subscribe for the rights shares. However, according to the
Commissioner of Income-tax (Appeals), gift tax proceedings had to be initiated
by the Department not against the appellant-company but it ought to have
initiated gift-tax proceedings against the exiting shareholders who had
renounced their rights. Having so held, the Commissioner of Income-tax
(Appeals) came to the conclusion that the entire exercise undertaken by the
appellant was to avoid payment of wealth-tax and therefore, it was held that
the company was liable to pay gift-tax for transfer of the said shares to the
seven investment companies. This decision of the Commissioner of Income-tax
(Appeals) stood reversed by Tribunal which decided the appeal filed by the
company against the Department. The Tribunal came to the conclusion that the
allotment of rights shares by the appellant did not constitute ‘transfer’ as
it did not involve any existing property at the time of such allotment.
According to the Tribunal, the seven investment companies made payment towards
the face value of the shares and, consequently, it cannot be said that the
contract was without consideration. It was further held that in this case
there was no element of gift u/s.4(1)(a) as there was no transfer of property
as defined u/s. 2(xxiv) of the 1958 Act. Aggrieved by the decision of the
Tribunal, the Department preferred gift-tax Appeal No. 2/02 which, vide the
impugned judgment stood disposed of in favour of the Department.

On an appeal by the assessee, the Supreme Court held that
there is a vital difference between ‘creation’ and ‘transfer’ of shares. As
stated hereinabove, the words ‘allotment of shares’ have been used to indicate
the creation of shares by appropriation out of the unappropriated share
capital to a particular person. A share is a chose-in-action. A
chose-in-action implies existence of some person entitled to the rights in
action in contradistinction from rights in possession. There is a difference
between issue of a share to a subscriber and the purchase of a share from an
existing shareholder. The first case is that of creation, whereas the second
case is that of transfer of chose-in-action. In this case, when twenty
shareholders did not subscribe to the rights issue, the appellant allotted
them to the seven investment companies, such allotment was not transfer. In
the circumstance, S. 4(1)(a) was not applicable as held by the Tribunal.

The Supreme Court further held that there is a difference
between ‘renunciation’ and ‘allotment’. In this case, the Department has
confused the two concepts. The judgment of the Madras High Court in the case
of S. R. Chockalingam Chettiar, (1968) 70 ITR 397 dealt with the case of
renunciation in which case under certain circumstance the renouncer could be
treated as a donor liable to be taxed u/s.4(1)(a) of the Gift-tax Act, 1958.
That was not the situation here. The Department had sought to tax the
appellant-company as a donor under the 1958 Act for making allotment of rights
shares. The Department had not taxed the renouncer shareholders despite the
decision of the Commissioner of Income-tax (Appeals). Allotment is not a
transfer. Moreover, there is no element of existing right in the case of
allotment as required u/s.2(xii) of the 1958 Act. In the case of renunciation
for inadequate consideration in a given case S. 4(1)(a) could stand attracted.
However, in such a case, the Department has to proceed against recouncer
(shareholder). For the above reasons, the judgment of the Madras High Court in
S. R. Chockalingam Chettiar’s case (1968) 70 ITR 397 had no application.

The second issue to be decided by the Supreme Court was
whether there was an element of ‘gift’ in the appellant issuing bonus shares
in the ratio of 1 : 23 in April/May, 1986. In addition to the levy of gift-tax
on the allotment of rights shares, the Assessing Officer levied gift tax on
the bonus shares issued later by the appellant. The Supreme Court held that
when a company is prosperous and accumulates a large surplus, it converts this
surplus into capital and divides the capital amongst the members in proportion
to their rights. This is done by issuing fully paid shares representing the
increased capital. Shareholders to whom the shares are allotted have to pay
nothing. The purpose is to capitalise profits which may be available for
division. Bonus shares go by the modern name of ‘capitalisation shares’. If
the articles of a company empower the company, it can capitalise profits or
reserves and issue fully paid shares of nominal value, equal to the amount
capitalised, to its shareholders. The idea behind the issue of bonus shares is to bring the nominal share capital into line with the excess of assets over liabilities. A company would like to have more working capital, but it need not go into the market for obtaining fresh capital by issuing fresh shares. The necessary money is available with it and this money is converted into shares, which really means that the undistributed profits have been ploughed back into the business and converted into share capital. Therefore, fully paid bonus shares are merely a distribution of capitalised undivided profit. It would be a misnomer to call the recipients of bonus shares as donees of shares from the company. The profits made by the company may be distributed as dividends or retained by the company as its reserve which may be used for improvement of the company’s works, buildings and machinery. That will enable the company to make larger profits. There cannot be any dispute that the shareholders will benefit from the improvements brought about in profit-making apparatus of the company. Like-wise, if the accumulated profits are capitalised and capital base of the company is enlarged, this may enable the company to do its business more profitably. The shareholders will also benefit if the capital is increased. They may benefit immediately by issue of bonus shares. But neither in the case of improvement in the profit-making apparatus nor in the case of expansion of the share capital of the company, can it be said that the shareholders have received any money from the company. They may have benefited in both the cases. But this benefit cannot be treated as distribution of the amount standing to the credit of any reserve fund of the company to its shareholders.

One of the points raised on behalf of the Department before the Supreme Court was that the entire exercise undertaken by the appellant constituted tax evasion. According to the Department, by a paltry investment of Rs.10 lakhs (approximately) the seven investment companies became owners of 24,00,168 shares of M/s. Khoday Distilleries Ltd. worth Rs. 2,40,01,680. According to the Department, the market value of the said shares and the yield from the said shares were totally disproportionate to the investment made by the seven investment companies. Therefore, according to the Department, the modus operandi adopted by the appellant was an exercise in tax evasion. The Supreme Court observed that it does not know the reason why the Department had not proceeded under the Income-tax Act, 1961, if, according to the Department, the case was of tax evasion. According to the Commissioner of Income-tax (Appeals), the appellant had undertaken an exercise to avoid wealth-tax, whereas according to the Assessing Officer the exercise undertaken by the appellant was to evade gift-tax and in the same breath the Assessing Officer states that the entire exercise was to evade tax by allotting shares to the directors which attracted the deeming prevision of S. 2(22) of the 1961 Act. According to the Supreme Court there was utter confusion on this aspect. The Supreme Court, therefore, was of the view that on the question of evasion of tax, the contention of the Department was conflicting and in fact, the Department had messed up the entire case.

The Supreme Court, therefore, set aside the judgment of the High Court and the civil appeal filed by the assessee was allowed.

High Court — Writ petition — Whether appeal lies to the Division Bench or not is not to be decided on the basis of nomenclature given in writ petition.

New Page 1

  1. High Court — Writ petition — Whether appeal lies to the
    Division Bench or not is not to be decided on the basis of nomenclature given
    in writ petition.

 

[M.M.T.C. Ltd. v. CCT & Ors., (2008) 307 ITR 276
(SC)]

The challenge in the appeal to the Supreme Court was to the
judgment of the Division Bench of the Madhya Pradesh High Court dismissing the
writ appeal filed by the appellant on the ground that it was not maintainable.
The appeal was filed u/s.2(1) of the M.P. Uchcha Nyayalay (Khand Nyaypeeth Ko
Appeal) Adhiniyam, 2005 (hereinafter referred to as, ‘the Act’). It was held
that the order was passed in exercise of power of superintendence under
Article 227 of the Constitution of India, 1950 (in short, ‘the Constitution’)
against which the Letters Patent appeal is not maintainable. The order of the
learned Single Judge was passed on 09.11.2005. Against the said order, special
leave petition was filed which was disposed of by the Supreme Court by order
dated February 16, 2006.

The Supreme Court had directed the High Court to consider
the LPA on the merits and time was granted to prefer the LPA within three
weeks. The High Court was directed to dispose of the LPA on the merits if it
was otherwise free from defect.

The High Court construed the order as if the Supreme Court
had only waived the limitation for filing of the Letters Patent appeal and
there was no direction to consider the case on merits.

Before the Supreme Court it was contended that the
conclusion of the High Court that merely limitation was waived was contrary to
the clear terms of the earlier order of this Court. Additionally, it was
submitted that the prayer in the writ petition was to quash the order passed
by the Assistant Commissioner, Commercial Tax. That being so, the mere fact
that the writ petition was styled under Article 227 of Constitution was of no
consequence. It is the nature of the relief sought and the controversy
involved which determines the article which is applicable.

The Supreme Court held that the High Court was not
justified in holding that the Supreme Court’s earlier order only waived the
limitation for filing a Letters Patent appeal. The Supreme Court held that on
that score alone the High Court’s order was unsustainable.

The Supreme Court observed that in addition, the High Court
seemed to have gone by the nomenclature, i.e., the description given in
the writ petition to be one under Article 227 of the Constitution. The High
Court did not consider the nature of the controversy and the prayer involved
in the writ petition. As noted above, the prayer was to quash the order of
assessment passed by the Assistant Commissioner, Commercial Tax levying
purchase tax as well as entry tax.

The Supreme Court referring to the precedents held that the
High Court was not justified in holding that the Letters Patent appeal was not
maintainable. In addition, a bare reading of the Court’s earlier order showed
that the impugned order was clearly erroneous. The impugned order was set
aside directing that the writ appeal shall be heard by the Division Bench on
merits.

levitra

Disclosure regarding Foreign Currency Convertible Bonds (FCCBs) and premium on redemption of FCCB

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10 Disclosure regarding Foreign Currency
Convertible Bonds (FCCBs) and premium on redemption of FCCB


Fame India Ltd. — (31-3-2008)


From Notes to Accounts :


On 21 April 2006, the Company, pursuant to a resolution of
the Board of Directors dated 28 January 2006 and by a resolution of the
shareholders dated 8 March 2006, issued

(i) 12000, Zero Coupon Series A Unsecured Foreign Currency
Convertible Bonds (‘Series A Bonds’) of the face value of US $ 1000; and

(ii) 8,000, 0.5% per annum Series B Unsecured Foreign
Currency Convertible Bonds (‘Series B Bonds’) of the face value of US $ 1000
aggregating to USD 20,000,000 (approximately Rs.901,000,000) due in 2011 (the
Series A Bonds and the Series B Bonds are collectively called the ‘Bonds’).
The Series Bonds bear interest at the rate of 0.5% per annum, which accrues
semi-annually in arrears on 31 December and 30 June of each year. Interest
will accrue on each interest payment date and on maturity, accrued interest
will be paid. The Bonds will mature on 22 April 2011.

 


The Bonds are convertible at any time on or after 21 May 2008
and prior to 12 April 2011 at the option of the Bond holders into newly issued,
ordinary equity share of par value of Rs.10 per share (‘Shares‘), at an initial
conversion price of

(i) Rs.90 per share for Series A Bonds; and

(ii) Rs.107 per share for Series B Bonds

(as defined in terms and conditions for the Bonds) at the
rate of exchange equal to the US Dollar to Rupees exchange rate as announced
by the Reserve Bank of India (the ‘RBI’) on the business day immediately prior
to the issue date. The conversion price is subject to adjustment in certain
circumstances.

 


Unless previously converted, redeemed or repurchased and
cancelled,

(i) the Series A Bonds will be redeemed on 22 April 2011 at
137.01% of their principal amount representing a gross yield to maturity of
6.5%; and

(ii) the Series B Bonds will be redeemed on 22 April 2011
at 140.69% of their principal amount representing a gross yield to maturity of
7.5%.

 


During the year 1,504,999 (31 March 2007; Nil) equity shares
of Rs.10 each were allotted against 3000 Series A Foreign Currency Convertible
Bonds (FCCB) of US $ 1,000 each at an exercise price of Rs.90 per share and
1,687,850 (31 March 2007; Nil) equity shares of Rs.10 each were allotted against
4000 Series B FCCB of US $ 1,000 each at an exercise price of Rs.107 per share,
thus aggregating to a total allotment of 3,192,849 equity shares of Rs.10 each
of the Company.

 

Exchange gain/loss arising on such conversion have been
adjusted against share premium reserve. Premium on FCCB amortised and adjusted
to the share premium account up to the date of conversion has been reversed.

 

The Bond issue expenses have been adjusted against share
premium as per the provision of Section 78 of the Act.

 

Utilisation up to 31 March 2008 of the proceeds from the FCCB
issue is as under :

Purpose Amount in Rs.
(a) New cinema
complexes 		705,645,427
(b) Expansion/modernisation
of existing cinema complexes 		83,027,839
(c) FCCB issue
expense 		29,813,462
Total 818,486,728


(Currency :
Indian Rupees)




Balance
unutilised funds have been invested in :		  
(a) Deposit
accounts 		10,180,107
(b) Current
accounts 		 
— in India
 20,832,448
— outside
India 		8,151,235

The proceeds utilised have been converted at an average
exchange rate of Rs.42.58 per US $ and the balance outstanding as at 31 March
2008 is translated at the exchange rate of Rs.39.97 per US $, being the exchange
rate as at 31 March 2008.

 Premium on redemption of Foreign Currency Convertible Bonds (FCCB)

* Premium payable on redemption of FCCB charged to the securities premium account has been provided pro rata for the year. In the event the conversion option is exercised by the holders of FCCB in future, the amount of premium charged to the securities premium account will be suitably adjusted in the respective years.


Opinion of Expert Advisory Committee of ICAI not followed regarding revenue recognition

Opinion of Expert Advisory Committee of ICAI not followed regarding treatment of dredger spares

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8 Opinion of Expert Advisory Committee of
ICAI not followed regarding treatment of dredger spares


Dredging Corporation of India Ltd. — (31-3-2008)

From Notes to Accounts :

On a reference made by DCI regarding accounting treatment of
spares issued to dredgers, the Expert Advisory Committee of Institute of the
Chartered Accountants of India gave its opinion on 27th May 2008, which was
received by the Company on 31st May 2008. As per the opinion, if the spares are
of capital nature and purchased subsequent to the acquisition of particular
dredger, these need to be capitalised and depreciated systematically over the
remaining useful life of the particular dredger. In case where the useful life
of the particular dredger has been completed, the same is to be charged to
Profit & Loss A/c through depreciation. Since the opinion has come after the
close of the accounting period and several complexities are involved, no
adjustments have been made in the accounts for the year in this regard. The
Company proposes to implement the same from Financial Year 2008-09 onwards after
examining all the issues involved.

 

From Auditors’ Report :

Reference is invited to Note 9(g) of Notes on Accounts. As
per the Expert Advisory Committee of ICAI’s opinion, the accounting practice of
charging off spares to expenditure as when issued to dredgers is not in
accordance with the provisions of AS- 10 and its effect on current year’s profit
is not quantifiable.

levitra

Section C : Withdrawal of Audit Report issued earlier : Satyam Computer Services Ltd.

New Page 2

Compilers’ Note :


In the case of the above company, Statutory Audit Reports and
Limited Review Reports for the period June 2000 to September 2008 were issued by
the Statutory Auditors as required under the provisions of the Companies Act,
1956 and Clause 41 of the Listing Guidelines. In view of certain developments,
the said reports have been withdrawn by the Statutory Auditors by writing a
letter to the new Board of Directors and the Company Secretary with copies
marked to the ROC, SEBI, RBI, CBDT, BSE, NSE, NYSE. The said letter of the
Statutory Auditors is reproduced below.

 

Dear Sirs,


Re : Our audit of your financial statements


1. As statutory auditors, we performed audits of Satyam
Computer Services Limited (the ‘Company’) from the quarter ended June
2000 until the quarter ended September 30, 2008 (‘Audit Period’).

 

2. The above-referred financial statements were prepared by
the management of the Company.

 

3. We planned and performed the required audit procedures on
such financial statements, and examined the books and records of the Company
produced before us by the Company management. We placed reliance on management
controls over financial reporting, and the information and explanations provided
by the management, as also the verbal and written representations made to us
during the course of our audits.

 

4. As you are aware, vide a letter dated January 7, 2009 (“Chairman’s
Letter”) addressed to the erstwhile Board of Directors of the Company, the
former Chairman of the Company, Mr. Ramalinga Raju has stated that the financial
statements of the Company have been inaccurate for successive years. The
contents of the said letter, even if partially accurate, may have a material
effect (which effect is currently unknown and cannot be quantified without a
thorough investigation) on the veracity of the Company’s financial statements
presented to us during the Audit Period. Consequently, our opinions on the
financial statements may be rendered inaccurate and unreliable. A copy of the
Chairman’s Letter, extracted from the official website of the National Stock
Exchange is annexed hereto as Annexure A, for the sake of record. (not
reproduced here)

 

5. The ICAI has issued a guidance note on revision of audit
reports in January 2003 (‘Guidance Note’), which prescribes steps to be
followed by the auditor to prevent reliance on audit reports in such
circumstances. In view of the contents of the Chairman’s Letter, we hereby, in
accordance with the Guidance Note, state that our audit reports and opinions in
relation to the financial statements for the Audit Period should no longer be
relied upon.

 

6. Such a requirement is also prescribed under the generally
accepted accounting standards in the United States, where, as you are aware, the
American Depository Receipts of the Company are listed. We wish to inform you
that pursuant to Section 10A of the United States Securities and Exchange Act of
1934, the information contained in the Chairman’s Letter indicates that an
illegal act could have occurred. Accordingly, we advise that the Board of
Directors of the Company should promptly commence an independent investigation
pursuant to Section 10A of the United States Securities and Exchange Act of 1934
in order to determine whether such illegal acts occurred and, if so, the nature
and extent of such acts.

 

7. We hope to work with the Company and provide assistance to
the new Board of Directors to address any issues that arise in the course of
such investigation, to enable both the Company and us as your Statutory Auditors
to fulfil obligations under applicable law.

 

8. We wish to advise that the Company should promptly notify
any person or entity that is known to be relying upon or is unlikely to rely
upon our audit report that our audit opinion should no longer be relied upon.

 

9. Consequently, such notification should be made to at least
the Company’s shareholders, lenders, creditors, Indian regulatory authorities
and the United States Securities and Exchange Commission, and indeed to all the
stock exchanges, whether in India or abroad, where such securities of the
company are listed. We expect such notification would be made promptly and
request that the Company advise us as soon as the notification has been made.
Since we are required under the Guidance Note to mark a copy of this letter to
the relevant regulatory authorities, we have done so.

levitra

Section A : Audit Report containing Qualifications on Going Concern, etc.

New Page 1Spicejet Ltd. — (31-3-2008)

From Notes to Accounts :


3. Legal proceeding by and/or against the company

3.1 Share capital includes 11,624,472 equity shares of Rs.10
each (issued at a premium of Rs.30 each) originally allotted to the three
investment companies of S. K. Modi Group (SKM). These shares were partly paid
and were treated as fully paid by adjusting the calls in arrears of Rs.333.18
million against assignment of security deposit of Rs.360 million by Agache
Associates Limited (belonging to SKM) in favour of the said investment
companies. The Security deposit of Rs.360 million was shown payable to Agache
Associates Limited, under a purported lease agreement dated September 11, 1995,
which was to be effective from April 1, 1996 for a property situated at
Calcutta, West Bengal. Subsequently, the Delhi High Court has passed an order on
July 15, 2005 appointing Receivers to sell shares belonging to SKM’s group
companies and deposit the proceeds with the Court. The manner of receipt of
these sale proceeds by the Company shall be decided by the Court in the pending
proceedings. The Company had also filed a criminal complaint in the Court of
Chief Metropolitan Magistrate, New Delhi against some of the erstwhile promoter
directors and ex-employees of the Company for executing the above transaction.

3.3 In respect of ICDs aggregating Rs.100 million, the
Company has not accrued interest payable amounting to Rs.240.95 million up to
March 31, 2008 (previous year Rs.222.15 million), computed based on interest
rates as per original contract terms for reasons explained below :


l
ICD of Rs.50 million in the name of Agache Associates Limited (affiliated to
SKM) being a party to the fraudulent transactions (Refer Note 3.1 above).


l
In a suit filed by one of the ICD lenders (petitioners), the Company had
deposited a sum of Rs.50 million with the Bombay High Court and the Hon’ble
Bombay High Court later allowed the petitioner to withdraw the said amount
upon furnishing an undertaking that the petitioner will restitute the said sum
or such part thereof, with 9% interest, to the Company, if and as directed by
the Court at the time of the final decision of the suit filed by the
petitioner. Accordingly, pending finality of the matter, both the ICD and
deposit with the High Court have been disclosed under the unsecured loans and
advances, respectively.



3.5 The Company has in its possession the bank-statement of
ICICI Bank, New Delhi, which shows a deposit of Rs.34.29 million on account of
refunds from the Income-tax Department on November 6, 2000 and July 2, 2001 and
subsequent withdrawals (details of amounts appropriated not available with the
Company) on various dates aggregating to Rs.34.29 million against cheques/drafts
issued to several parties, including group companies of SKM, by erstwhile
Director(s) and/or some ex-employees of the Company, which amount to fraudulent
preference under Section 531 of the Companies Act, 1956, which was brought to
the notice of the Hon’ble Court vide CA 606of 2003 and CA797 of 2000. The
difference of Rs.34.29 million between balance as per books (since no accounting
entry has been recorded for unauthorised withdrawals) and that confirmed by the
bankers, is being carried as recoverable under Loans and Advances and is pending
appropriate adjustment on outcome of the ongoing cases and has not been provided
for in the accounts.

3.7 The Company has in its possession the bank statement of
Standard Chartered Grindlays Bank, Mumbai, which shows deposits of Rs.14.20
million and withdrawals of Rs.16.01 million through various transactions made
during the period March 1999 to March 2002. However, in the absence of complete
details of these transactions, appropriate accounting entries could not be
recorded in the books in respect of these transactions. The difference of
Rs.1.81 million between the balance as per books and that confirmed by the bank,
is carried as recoverable under ‘Loans and Advances’ and is pending appropriate
adjustment on the outcome of the ongoing litigations with SKM and entities in
which they are interested.

5. The Management and Board of Directors of the Company are
looking at various steps to improve financial performance of the Company by
rationalising network, improve yield and lower non-fuel costs as a result of
industrywide efforts. Steps are also being taken to evaluate various
alternatives for raising funds for which a merchant banker has been appointed.
The Board of Directors expects improvement in the business results in the
forthcoming years. Accordingly, the financial statements have been prepared on
going concern basis.

From Auditors’ Report :

4. Without qualifying our opinion, we draw attention to Note 5in Schedule XVII to the financial statements which indicate that the Company has suffered recurring losses from operations with net loss for the year ended March 31, 2008, without considering the impact of the matters mentioned in paragraph 5 below, amounting to Rs.1,335.07 million, and as of that date, the Company’s accumulated losses amounted to Rs.5,074.52 million, as against the Company’s share capital and reserves of Rs.5,354.33 million. Also, as discussed in Note 3 in Schedule XVII to the financial statements, realisation of the carrying amount of certain receivable amounting to Rs.68.82 million and dismissal of interest liability amounting to Rs.240.95 million is dependent upon success of the claims filed by the Company against some of the erstwhile directors and employees. These conditions raise significant doubt about the Company’s ability to continue as a going concern. Management’s plans in regard to these matters are also described in Note 5. The accompanying financial statements do not include any adjustments that might result from the outcome of these uncertainties and also do not include any adjustments relating to the recoverability and classification of asset carrying amount or the amount and classification of liabilities that might be necessary should the Company be unable to continue as a going concern.

5. We report  that:

(a) As more fully explained in the Note 3.1 of Schedule XVII to the financial statements, an amount of Rs.360 million, given as security deposit towards lease of a property, is carried as recoverable under the head Loans and Advances, of which an amount of Rs.26.82 million appears to be doubtful for recovery. The Company has not made provision for this doubtful amount in the financial statements.

(b) As more fully explained in the Note 3.3 of Schedule XVII to the financial statements, the Company has not accrued interest in respect of outstanding inter-corporate deposits of Rs.10 million, which as at March 31, 2008 amounts to Rs.240.95 million.

6. (e) Subject to our comments in paragraph 5 above, ….

Consolidation — redefining control and reflecting true net worth

Background :

    Consolidated financial statements in India have traditionally been a reporting requirement only for listed companies. Companies not listed on stock exchanges are not required to prepare or present consolidated financial statements.

    The fundamental change under IFRS is that IFRS recognises consolidated financial statements as the primary set of financial statements for any entity that has subsidiaries or joint ventures or associates. The only exception for an entity not to report consolidated financial statements is if it meets all the following conditions :

    (a) the parent is itself a wholly-owned subsidiary, or is a partially-owned subsidiary of another entity and its other owners, including those not otherwise entitled to vote, have been informed about, and do not object to, the parent not presenting consolidated financial statements;

    (b) the parent’s debt or equity instruments are not traded in a public market;

    (c) the parent did not file, nor is it in the process of filing, its financial statements with a securities commission or other regulatory organisation for the purpose of issuing any class of instruments in a public market; and

    (d) the ultimate or any intermediate parent of the parent produces consolidated financial statements available for public use that comply with International Financial Reporting Standards.

    In this article we shall discuss the differences in principles of consolidation as laid down in IAS 27 ‘Consolidated and separate financial statements’ under IFRS and AS-21 ‘Consolidated financial statements’ under Indian GAAP. We will cover some of the implementation challenges and impact of the subtle differences in the consolidation standard between Indian GAAP and IFRS in our next article.

Key differences and implication :

Definition of control :

    Under the IFRS framework, consolidation is based on the power to control (i.e., the ability of one entity to control another). Hence, understanding what constitutes ‘control’ is of utmost importance. Control is defined as the power to govern the financial and operating policies of an entity so as to obtain benefits from its activities. This definition is not unlike what is stated under AS-21 in Indian GAAP. However, where Indian GAAP takes a narrow view and assumes that holding a majority of the voting interest of an entity automatically results in controlling the entity, IFRS treats the same as a rebuttable presumption. Thus, IFRS provides that control is presumed to exist when the parent owns, directly or indirectly through subsidiaries, more than half of the voting power of an entity, unless in exceptional circumstances, it can be clearly demonstrated that such ownership does not constitute control.

    The implication of the control principles under IFRS is that companies cannot consolidate an entity only based on holding of current voting interests. Since consolidation is based only on control, only one holding entity will practically be able to demonstrate such control and hence there will never be a scenario where the same entity is being consolidated by two separate holding entities as a subsidiary. As a result of the transition to IFRS, the holding in the entity will need to be re-looked for assessment of potential voting rights held and more importantly an evaluation of the nature of any veto rights held by other shareholders, which are discussed below.

Potential voting rights :

    In assessing control, the impact of potential voting rights that currently are exercisable should be considered. Such potential voting rights may take many forms, including call options, warrants, convertible shares, and contractual arrangements to acquire shares. This is because the potential voting rights give the holders the power to control the entity because they can step in and acquire control at any time if they wish to.

    For example, X owns 40% of the voting power in A, Y owns 25% and Z owns the other 35%. Further, X holds a call option to acquire from Y an additional 20% of the voting power in A; the call option can be exercised at any time. Accordingly, it is X that has the power to govern A. Therefore X consolidates A, but reflects 60% as non controlling interest.

Participative rights with other shareholders :

    The presumption of control may be rebutted in exceptional circumstances if it can be demonstrated clearly that such ownership does not constitute control. To ascertain whether ownership constitutes control, the rights of minority interests need to be analysed. In many cases minorities have certain rights even if another party owns the majority of the voting power in an entity. Sometimes these rights are derived from law, and other times from the entity’s constitution.

    IFRSs do not address the issue of minority rights but as discussed above it is necessary to consider the nature and extent of the rights of minority in determining control, including the distinction between participating rights that allow minority to block significant decisions that would be expected to be made in the ordinary course of business, and rights that are protective in nature. Since IFRS does not have specific literature on minority rights, guidance is drawn from EITF 96-16 under US GAAP to determine if certain rights are participative and hence demonstrate absence of control with the majority shareholder. Examples of participative rights are :

  •      Approval from minority shareholders for selecting, terminating, and setting the compensation of management responsible for implementing the investee’s policies and procedures.

  •      Approval from minority shareholders for establishing operating and capital decisions of the investee, including budgets, in the ordinary course of business.

For example, two companies A and B come together to form a company X in which company A holds 75% with 3 directors on the board of company X and company B holds 25% with 2 directors on the board of company X. By virtue of majority holding, company A consolidates company X as a subsidiary under Indian GAAP. The Articles of Association of company X state that for certain decisions, a unanimous approval of the board of directors is required. These decisions include approving the annual and semi-annual budgets of the company and selection and appointment of senior management personnel. In such a case, Under IFRS, company A does not control company X, instead it shares joint control over it along with company B. Hence it shall not consolidate company X as a subsidiary but account for it as a joint venture arrangement.

Indirect holding:

Indirect holding mayor may not result in one entity having control over another. Although the total ownership interest may exceed 50%, this may not mean that the entity has control.

For example, entity L owns 35% of the voting power in entity N, and 40% of the voting power in entity M. M owns 60% of the voting power in N. There-fore, L has, directly and indirectly, a 59% [35% + (60% x 40%)] ownership interest in N.

However, L doesn’t control 59% of the vote because it does not have control over the votes exercised by M; rather, it is limited to significant influence. Therefore, in the absence of any contrary indicators, L does not control N and should  not consolidate  N.

Non-controlling interest (‘NCI’) :

Minority interests are referred as non-controlling interests (‘NCI’) under the revised IAS 27 standard and are presented as a part of consolidated equity. It is defined as ‘the equity in a subsidiary not attributable, directly or indirectly, to a parent’. This is unlike Indian GAAP, where minority interests are reflected outside consolidated equity (generally, as a liability).

Losses applicable to NCI are allocated irrespective of whether the NCI has a contractual obligation to make good such losses to the parent, even if doing so causes the NCI to be in a deficit position. Once again, this is unlike the treatment of excess losses under Indian GAAP.

Changes in controlling interests:

Under IFRS, changes in the  parent’s ownership interest in a subsidiary after control is obtained that do not result in a loss of control need to be accounted for as transactions with owners in their capacity as owners. As a result no gain or loss on such changes is recognised in the income statement. Also, no change in the carrying amounts of assets (including goodwill) or liabilities is recognised as a result of such transactions.

For example, Entity A owns 60% of the shares in Entity B. On 1st January 2010 Entity A acquires an additional 20% of Entity B. The consideration transferred for the additional shares of Entity B is INR 400. The carrying amount of non-controlling interest in the consolidated financial statements of Entity A on 1st January 2Q10 is INR 500.

The acquisition of the 20% interest of the non-controlling interest is recorded as follows:

Entity A recognises the decrease in equity in its consolidated financial statements. No adjustments are made to the recognised amounts of assets and liabilities or to goodwill.

Under Indian CAAP, the above acquisition of 20% additional interest would result in additional good-will for .the difference between the consideration transferred (INR 400) and the book value of the minority interest purchased.

Similarly, a reduction in equity interests from 80% to 60% due to sale of shares to minority interests (however control retained by the Company) would also have been adjusted in equity in the same manner as above, unlike Indian CAAP where a gain or loss on such sale of stake would have been rec-ognised in profit and loss e.g., : If the sale of 20% stake was made for a consideration of INR 500 (thus reducing the overall stake from 80% to 60%), and the net assets of the subsidiary were INR 1500 – Under IFRS, this transaction would result into an additional credit of INR 300 (1500*20%) to non-controlling interests and a credit of INR 200 to other equity, whereas under Indian CAAP the adjustment of INR 200 would have been recognised as a gain in the income statement.

Under IFRS, when a change in controlling interests results in loss of control (e.g., due to sale of investment in the subsidiary, due to which the investee company ceases to be a subsidiary), such a change is accounted for in two parts. Firstly, derecognise the net assets and goodwill of the subsidiary and recognise the relating gain or loss in income statement (by comparing it to the fair value of consideration received). Secondly, recognise any balance investment in the former subsidiary at fair value.

For example, Entity A owns 60% of the shares in Entity B. On 1st January 2010 Entity A disposes of a 20% interest in Entity B and loses control over Entity B. The consideration received for the sale of shares of Entity B is INR 400. At the date that Entity A disposes of a 20% interest in Entity B, the carrying amount of the net assets of Entity B is INR 1,750. The amount of non-controlling interest in the consolidated financial statements of Entity A on 1st January 2010 is INR 700. The fair value of the remaining 40% investment is determined to be INR 800.

Entity A would record the following entry to reflect its disposal of a 20% interest in Entity B at 1st January 2010 :

The gain represents the increase in the fair value of the retained 40% investment of INR 100 [INR 800 – (40% x INR 1,750)], plus the gain on the sale of the 20% interest disposed of INR 50 [INR 400 – (20% x INR 1,750)].

Assuming that the remaining interest of 40% represents an associate, the fair value of INR 800 represents the cost on initial recognition and IAS 28-Accounting for associates applies going forward.

Under Indian CAAP, the gain on sale in the above case would be recognised based on the difference between the consideration received (INR 400) and the proportionate carrying value of the investment in the subsidiary. The carrying value of the balance investment would not be revalued to the fair value
unlike  IFRS.    ‘

Special purpose entities:

Under IFRS, there is no requirement for the parent to have a shareholding in a subsidiary, and this is not a necessary pre-condition for control. Sometimes an entity is created to accomplish a narrow and well-defined objective (e.g., conduct research and development activities, securitise financial assets, or own a specified asset). Such entities are referred to as Special Purpose Entities (SPE) and SIC 12 ‘Consolidation – Special purpose entities’ lays down the guidance for consolidation of SPEs. Important to bear in mind when analysing an SPE is the requirement to account for the substance and economic reality of a transaction rather than only its legal form. Conditions where an entity controls an SPE and hence needs to apply consolidation are given below:

a) in substance, the activities of the SPE are being conducted on behalf of the entity according to its specific business needs so that the entity obtains benefits from the SPE’s operation;

    b) in substance, the entity has the decision-making powers to obtain the majority of the benefits of the activities of the SPE or, by setting up an ‘autopilot’ mechanism, the entity has delegated these decision-making powers;

    c) in substance, the entity has rights to obtain the majority of the benefits of the SPE and there-fore may be exposed to risks incidental to the activities of the SPE; or

    d) in substance, the entity retains the majority of the residual or ownership risks related to the SPE or its assets in order to obtain benefits from its activities.

Using this approach, several SPE’s that have been set up by Indian companies for specific purposes (without any direct holding of voting interest or Board representation) may need to be consolidated, if the conditions of SIC 12 are met. This involves significant use of judgment and an evaluation of all the facts and circumstances of the case. Such entities are typically not consolidated under Indian CAAP. In the Indian context, some of the above parameters may get triggered in arrangements of ‘toll manufacturers’ – a practice which is fairly common in the FMCC and pharmaceuticals industry.

Conclusion:

Consolidation is an area which needs careful evaluation on convergence with IFRS. The changes due to such transition could result in a change in the group i.e., subsidiaries which were earlier part of the group may now become joint ventures or associates; and special purpose entities which were earlier not consolidated would now form part of the consolidation group. Consolidation in IFRS essentially revolves around the concept of unilateral control of the financial and operating policies of the investee company and lays importance on substance over form. It is important to note here that IASB has issued an Exposure Draft ‘ED 10 – Consolidated Financial Statements’ that under one standard now covers concepts of participative and protective rights of non-controlling interest and special purpose entities.

Financial instruments : Disclosures — Practical application and challenges

Financial Instruments — Indian corporates need to gear up for significant changes in the accounting landscape

IFRS

In recent times, a lot has been written and discussed in the
various forums regarding the role played by financial instruments-related
accounting standards and the contribution of ‘fair value’ accounting to the
current global liquidity crisis.

Accounting for financial instruments in general and fair
value accounting in particular is a highly complex and judgmental area, and
requires a very high degree of understanding and experience to implement and
interpret the guiding principles as envisaged in those standards.

Accounting for Financial Instruments is a complex exercise in
view of the varied kinds of instruments that are emerging in the market in the
recent past. International Financial Reporting Standards (IFRS) encompassing
IAS-32, IAS-39 and IFRS-7 deal with the principles involved in recognition,
measurement, disclosures and presentation of financial instruments. The
Institute of Chartered Accountants of India (ICAI) has also published Accounting
Standards (AS), viz., AS-30 on ‘Financial Instruments — Recognition and
Measurement’ and AS-31 on ‘Financial Instruments — Presentation’ which has been
pronounced and is made recommendatory from 01.04.2009 and mandatory from
01.04.2011. Further, AS-32 Exposure draft on ‘Financial
instruments — Disclosures’ has also been published in December 2007 issue of the
Chartered Accountant Journal. These are largely similar to their IFRS
counterparts. Thus, whether India converges to IFRS from 2011 or not, accounting
for financial instruments will largely be in accordance with the principles of
IAS-39 and IAS-32 from 1 April 2011.

The use of these standards ushers in the concept of fair
valuation, which records financial instruments at fair value and changes thereon
in reported earnings or within shareholders funds, depending on the nature of
the financial instrument. The impact of these standards shall cover a large
number of captions in a corporate financial statement including receivables,
payables, borrowings, loans and advances given, security deposits, investments
and even certain types of ‘equity’ instruments, thereby having a significant
impact on accounting for routine transactions entered into by companies in the
normal course of business. These impacts necessitate careful consideration by
corporates and their impact is not restricted to finance companies and banks.

Definition and classifications

Under IFRS, a financial instrument has been defined as a contract that gives rise to a financial asset in one entity with a corresponding liability or equity in another entity. Most monetary items will get covered by this definition such as trade receivables/payables, investments in shares/debentures, retention money, trade deposits, derivatives, financial guarantees, and loans and advances.

    Under the present Indian GAAP, Accounting Standard (‘AS’) 13 classifies an investment into long-term and current investment. Long-term investments are required to be recorded at cost, less any permanent diminution. Current investments are recorded at lower of cost or market. Detailed classification exists for banks as per RBI guidelines. Loans and receivables are stated at cost. Interest income on loans is recognised based on time-proportion basis as per the rates mentioned in the underlying loan agreement.

    On the other hand under IFRS, all financial assets are required to be initially classified into four categories, comprising (i) fair value through profit or loss (FVTPL), (ii) held-to-maturity (HTM), (iii) loans and receivables, and (iv) available-for-sale (AFS). All financial assets will have to be recorded at respective fair values at the time of initial recognition.

    Further, IAS-39 requires FVTPL and AFS assets to be measured at fair values at each subsequent reporting period. In case of FVTPL assets, the unrealised gain/loss is recognised in the profit and loss account whereas for AFS investments, it is recognised in equity until actually realised, whereupon it is transferred to the income statement. HTM and loans and receivable assets are reflected at amortised cost using effective interest method. However, the rules for classification of an investment as HTM are extremely stringent and any subsequent decision to sell these investments would result in adverse consequences, whereby all other existing HTM investments would need to be fair valued and there would be restrictions on future classifications.

    Financial liability is classified into two categories, viz., (i) financial liability at fair value through profit or loss (ii) residual category. The initial measurement is at cost, being the fair value of a consideration received, less transaction costs. Financial liabilities at fair value through profit or loss (including trading) liabilities are measured at fair value, and the change is recognised in the income statement for the period. All other (non-trading) liabilities are carried at amortised cost. Entities may elect to classify certain liabilities as ‘fair value through profit and loss’ if the liabilities are incurred to hedge certain related financial assets which are required to be recorded at fair value. In such a case, a fair value designation for the liabilities can be used to set off the fair value changes in the assets — a form of economic hedge accounting, without following the complex hedge accounting designation and effectiveness testing rules.

Derivatives

    The current Accounting Standards in India do not have any specific standard providing guidance on the recognition and valuation of derivatives. Accounting for certain plain vanilla foreign exchange forward contracts is based on AS-11. Certain exchange traded futures and options are accounted as per ‘Guidance Note on Accounting for Equity Index and Equity Stock Futures and Options’. As per this Guidance Note, mark-to-market losses are recognised but gains are ignored. Further, some derivative instruments may be required to be accounted as per the March 2008 announcement of the ICAI, whereby derivative instruments are to be mark to market with the resulting losses required to be recognised in the income statement based on the principles of prudence. Effective 1 April 2011, the treatment for the aforesaid transactions will need to comply with AS-30 issued by the ICAI. As stated earlier, the guidance in AS-30 is consistent with the requirements of IAS-39.

    IAS-39 deals with derivative instruments in a very comprehensive manner. A derivative is defined as a financial instrument or other contract with the following three characteristics, namely,

1) its value changes in response to the change in a specified interest rate, financial instrument price, commodity price, foreign exchange rate, index of prices or rates, credit rating or credit index, or other variable, provided in the case of a non-financial variable that the variable is not specific to a party to the contract (sometimes called the ‘underlying’);

2) it requires no initial net investment or an initial net investment that is smaller than would be required for other types of contracts that would be expected to have a similar response to changes in market factors; and

3) it is settled at a future date. Further all derivatives are recorded on balance sheet at fair value with changes in fair value being recognised in income statement unless it satisfies the hedge accounting criteria. This often results in significant volatility in reported income, which is not seen under the current Indian Accounting Standards.

Apart from stand-alone derivatives,  IAS-39 requires derivatives embedded or  contained in other contracts to be separated and accounted separately. For example, for convertible  bonds an investor will have to account for the equity option component separately  from the host debt contract. The value of the equity option component would be initially credited to equity. The resultant discount on the debt host would be amortised over the period of the debt to reflect the real cost of the debt instrument (based on market rates for non-convertible debt). Similarly, if an Indian entity has a contract for supply of goods/services denominated in Euros, with a counterparty based in a non-Euro zone country (for example, the U.S.), then there is an embedded rupee-Euro forward currency derivative, which will need to be separated from the host contract of supply of goods/ services and valued separately. The requirements for embedded derivatives will significantly enhance the valuation and measurement complexity of such instruments from current practice.
 
Hedge  accounting

As seen above, IAS-39 uses a measurement model that sometimes requires the measurement of assets and liabilities on different basis. This results in an accounting mismatch in profit or loss account, which results in volatility in reported results (and does not reflect the true performance of the Company in the income statement). Consequently the standard permits an entity to selectively measure assets, liabilities, firm commitments and certain forecast transactions on a basis different from that prescribed, or to defer /match the recognition of gains or losses on derivatives using hedge accounting.

The hedge accounting rules under IFRS are quite stringent and narrowly defined. Hedge accounting is permitted if at the inception of the hedge and on an ongoing basis, the expectation is that the hedge will be highly effective in achieving offsetting changes in fair value or cash flows attributable to the hedged  risk during  the period  for which  the of hedge  is designated  and ‘actual’ results  are within the 80-125% range. If the changes  don’t  fall within this  band,  then  the  hedge  is  ineffective and, therefore,  fair value  gains/losses   on the hedging contract   will  have  to be  taken  to  the  income statement. Hedges need to be on specifically identified items as against portfolios and should hedge-specific risks and characteristics identified and documented upfront. Stringent documentation criteria prescribed shall also have to be followed.

Hedge  accounting  is voluntary  and the decision to apply  hedge  accounting   should  be  made  on  a transaction  by transaction  basis. The correct use of hedge accounting  (for example,  designating  foreign currency  forward  contracts  as cash flow hedges  of forecasted  foreign  currency  sales) can ensure  that gains  and  losses  relating  to the  derivatives   are recorded   to reflect  the  economic   rationale   for undertaking  the transaction.  In the absence of hedge accounting,  gains and losses on derivatives  would be recorded  in periods  that may be different  from the periods in which the underlying  transactions  are recorded.

Substance over form

Under Indian GAAP, a financial instrument is v classified as either liability or equity, depending on form  rather  than  substance.

Redeemable preference shares are treated as capital under Schedule VI of the Companies Act,1956, even though in substance it may be a liability. However, under IAS-32, they will get classified as debt in the balance sheet of the issuers, since they meet the characteristic of a liability, i.e., redemption after a fixed period and dividend at a fixed rate. This would result in profit after tax numbers being lower, as preference dividend would be reflected as interest cost. Further, premium on redemption of preference shares will no longer be able to be adjusted in the securities premium account but will have to be recognised as an interest expense in the income statement.

Another significant area of impact would be the accounting for Foreign Currency Convertible Bonds (‘FCCB’). FCCBs are bonds that can be converted into equity by the investors before a certain date, or are repaid at an agreed premium at the end of the tenure. FCCBs (and other debt instruments) may be issued with a structure that allows the borrower to pay the entire interest on the instrument (along with the principal) to the investor only when the bond matures, in the form of a ‘redemption premium’. The Companies Act, 1956, Section 78, permits companies to adjust the redemption premium on debentures just as in equity shares, through the share premium account. This accounting treatment is currently fairly common amongst many Indian companies. This accounting treatment would not be permitted under IFRS, as all cost of issuing an instrument (including the redemption premium) would need to be recorded as interest cost over the life of the debt using the effective interest yield method.

Further, under IFRS, FCCBs will be subjected to split accounting. In accordance with the guidance in IAS-39 on the basis of which the conversion option is separated from the host contract i.e., the debt liability depends on the characteristic of the conversion option. If the conversion option meets the definition of equity, then the fair value of the liability without the conversion option is first determined and the residual amount of proceeds is then allocated to equity. If the conversion option is a derivative (i.e., if the conversion price is determined in a currency other than the functional currency of the Company), the fair value of the derivative is first determined with the residual allocated to the debt amount and the derivative portion is fair valued at every reporting date.

Impairment

In the case of banks, the existing provisions on non-performing assets are based on guidelines laid down by the Reserve Bank of India. IFRS prescribes an impairment model that requires case-by-case (for significant exposures) assessment of the facts and circumstances surrounding the recoverability and timing of the future cash flows relating to the credit exposure. An expectation that all contractual cash flows would not be recovered (or recovered without full future interest applications) will lead to an account being classified as impaired and impairment shall be measured on present value basis using the effective interest rate of the exposure as the discount rate. For groups of loans that share homogenous characteristics (such as mortgage and credit card receivables), impairment can be assessed on a collective basis. General provisions are permissible only to extent that they relate to a specified risk that can be measured reliably and for incurred losses. No provisions are permitted for future or expected losses. Provisioning for standard assets will not be permitted under IFRS.

For investments, a similar analysis is conducted, the key difference being that the fair value of the investment is also considered as an input in addition to the financial! credit standing of the issuer. The application of IAS-39 would also change accounting for items such as financial guarantees. It will affect key ratios and performance indicators for most banks and financial institutions, including capital adequacy ratios.

De-recognition

Under IFRS, de-recognition of financial assets is a complex, multi-layered area with the de-recognition decision dependent largely on whether there has been a transfer of risks and rewards. If the assessment of the transfer of risks and rewards is not conclusive, an assessment of control and the extent of continuing involvement are required to be performed.

Securitisation transactions shall be the most impacted area since most Indian securitisation vehicles are currently structured to meet Indian GAAP de-recognition norms stated under the Guidance Note on Accounting for Securitisation issued byfhe ICAL Substantially, all those securitisation vehicles would collapse into the transferor’s balance sheet and assets would fail the de-recognition test under IFRS. For example, securitisation transactions where credit collaterals are provided/guarantee is provided to cover credit losses in excess of the losses inherent in the portfolio of assets securitised, may not meet the de-recognition principles enunciated in IAS-39. This would lead to more instances of transfers failing the de-recognition criteria, thereby resulting in large balance sheets and capital adequacy requirements, lower return on assets and deferral of gains/losses on such securitisation transactions.

Disclosures

IFRS 7 requires entities to provide detailed disclosures in their financial statements that enable users to evaluate:

a) the significance of financial instruments for the entity’s financial position and performance; and

b) the nature and extent of risks arising from financial instruments to which the entity is exposed during the period and at the reporting date, and how the entity manages those risks. On 5 March 2009, the IASB has issued Improving Disclosures about Financial Instruments (Amendments to IFRS 7). The amendments require enhanced disclosures about fair value measurements and liquidity risk.

The disclosures required under IFRS 7 include quantitative as well as qualitative information. There is a significant amendment in IT/reporting systems which shall be required as there is no accounting standard in India corresponding to IFRS 7 requiring such extensive disclosures. The Announcement on ‘Disclosure regarding Derivative Instruments’, issued by the ICAI, requires the following disclosures to be made in the financial statements:

a) categorywise quantitative data about derivative instruments that are outstanding at the balance . sheet date,

b) the purpose, i.e., hedging or speculation, for which such derivative instruments have been acquired, and

c) the foreign currency exposures that are not hedged by a derivative instrument or otherwise.

Netting assets and liabilities will also be less common as the rules will require more conditions to be met before assets and liabilities can be offset. A mere right to set off will not be adequate and needs to be supplemented with a right and an intention to settle on a net basis the assets and liabilities under consideration.

To conclude, the advent of IFRS shall thus represent a significant challenge to preparers, auditors, accountants, regulators and analysts. As the complexity of accounting increases, focus on need for increased education and training on areas relating to the valuation and accounting for financial instruments increases. Accounting for financial instruments will not only lead to a major impact on measurement of results, but also impact the existing functionalities of the IT systems and processes of companies.

Block assessment : Ss. 158BC and 143(2) of I. T. Act, 1961 : Where the returned income is not accepted in the block assessment, service of notice u/s. 143(2) is necessary. Failure to serve notice u/s. 143(2) would render the block assessment invalid.

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34. Block assessment : Ss. 158BC and 143(2) of I. T. Act,
1961 : Where the returned income is not accepted in the block assessment,
service of notice u/s. 143(2) is necessary. Failure to serve notice u/s. 143(2)
would render the block assessment invalid.

[CIT vs. Pawan Gupta, 223 CTR 487 (Del).]

In this case the Delhi High Court held as under : 

“i) S. 143(2) is a mandatory provision whether one looks
at it from the standpoint of a regular assessment or from the standpoint of
an assessment under Chapter XIV-B.

ii) S. 143(2) has no application in a situation where the
AO, on receipt of return of undisclosed income in Form No. 2B, is satisfied
with the same as reflecting the true state of affairs and no further
information or explanation is called for from the assessee.

iii) However, where the AO is not inclined to accept the
return of undisclosed income filed by the assessee, the procedure prescribed
in Section 143(2) has to be followed. If an assessment order is passed in
such a situation without issuing a notice u/s. 143(2), it would be invalid
and not merely irregular.”

levitra

Advance Tax : Interest u/s. 234B : Failure by payer to deduct tax at source : Interest cannot be imposed on assessee.

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  1. Advance Tax : Interest u/s. 234B : Failure by payer to
    deduct tax at source : Interest cannot be imposed on assessee.

[DI(International Taxation) vs. NGC Network Asia LLC,
313 ITR 187 (Bom.)]

In this case there was short payment of advance tax on
account of the non-deduction of tax by the payer which it was required by law
to deduct u/s. 195 of the Income-tax Act, 1961. The Assessing Officer levied
interest u/s. 234B on account of short payment of advance tax due to such
non-deduction. It is the case of the Revenue that on failure of the payer to
deduct tax at source, it is the liability of the assessee to pay the advance
tax even on the amount which had not been deducted u/s. 195 of the Act. The
Tribunal held that the assessee was not liable to advance tax and cancelled
the levy of interest.

On appeal by the Revenue, the Bombay High Court upheld the
decision of the Tribunal and held as under :

“When duty was cast on the payer to deduct tax at source,
on failure of the payer to do so, no interest could be imposed on the assessee”.

levitra

Advance Ruling : S. 245R of I. T. Act, 1961 : Writ : Articles 226 and 227 of the Constitution of India : Authority for Advance Ruling is Tribunal : High Court can issue writ against advance ruling under Articles 226 and 227 of the Constitution of India.

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32. Advance Ruling : S. 245R of I. T. Act, 1961 : 
Writ : Articles 226 and 227 of the Constitution of India : Authority for Advance
Ruling is Tribunal : High Court can issue writ against advance ruling under
Articles 226 and 227 of the Constitution of India.

DTAA between India and UAE : NR company providing
remittance services to NRIs in UAE :  Liaison offices set up in India
performing auxiliary services : No permanent establishment of NR in India.
Amount earned by NR not assessable in India : S. 90 of I. T. Act, 1961 and
Arts. 5(3)(b) and 7 of DTAA.

[U.A.E. Exchange Centre Ltd. vs. UOI; 313 ITR 94
(Del.), 223 CTR 250 (Del).]

The petitioner is a company incorporated in the UAE. It
offered remittance services to NRIs in the UAE under contracts entered into
between the petitioner and the NRIs in the UAE. The funds were collected from
the NRI remitter in the UAE. A one- time fee of 15 dirhams was levied and
collected by the petitioner from the NRI remitters in the UAE. Funds were
transmitted to the beneficiaries of the NRI remitters in India either by
telegraphic transfer through normal banking channels via banks in India or by
involving the liaison offices of the petitioner in India, who in turn,
downloaded the information and particulars necessary for remittance by using
computers in India which were connected to the servers in the UAE, by drawing
cheques in banks on India and couriering/dispatching to the beneficiaries of
the NRI remitters in India. For the A. Ys. 1998 – 99 to 2003 – 04 the
petitioner had filed returns of income under the provisions of the Income-tax
Act, 1961 showing ‘Nil’ income. The returns were accepted by the Assessing
Officer. The petitioner had also made an application u/s. 245Q(1) of the Act
to the Authority for Advance Ruling (AAR) seeking an advance ruling with
respect to the following question :

“Whether any income is accrued/deemed to be accrued in
India from the activities carried out by the company in India.”

The AAR gave its ruling on 26.05.2004. The AAR held that
downloading of information by the liaison offices in India with regard to the
beneficiaries of the NRI remitters in India and thereupon the act of the
cheques or drafts being drawn on banks in India, in the name of the
beneficiaries and their dispatch through couriers to the beneficiaries
constituted an activity which enabled the petitioner to complete the
transaction of remittance, in terms of the contracts entered into with the
NRIs. From this the Authority concluded that there was, therefore, a real and
intimate relationship between the business carried on by the petitioner, for
which it received commission in UAE. The Authority held that the activities of
the liaison offices of downloading of information, printing and preparation of
cheques and drafts, and sending them to the beneficiaries if India contributed
directly or indirectly to the earning of income by the petitioner by way of
commission. The Authority concluded that the income would be deemed to accrue
or arise to the petitioner in the UAE from a ‘business connection’ in India.
Pursuant to the said ruling, the Assessing Officer issued notices u/s. 148 of
the Act.

On a writ petition challenging the said ruling, the Delhi
High Court held as under : 

“i) The Authority for Advance Ruling would qualify as a
tribunal within the meaning of Article 227 of the Constitution. Thus the
Authority would be amenable to the jurisdiction of the High Court under
Article 227, and more so, of the Article 226 of the Constitution which,
without doubt, has a wider reach being conferred with jurisdiction to issue
appropriate order or direction to any “person or authority” for enforcement
of fundamental rights under Part III of the Constitution as also for any
other purpose.

ii) Where India has entered into a treaty for avoidance
of double taxation as also in respect of purposes referred to in Section 90
of the Act, the contracting parties are governed by the provisions of the
treaty. The treaty overrides the provisions of the Act.

iii) Article 5(3) of the DTAA between UAE and India,
which opens with a non-obstante clause, is illustrative of instances where
under the DTAA various activities have been deemed as ones which would not
fall within the ambit of the expression “permanent establishment”. One such
exclusionary clause is found in Article 5(3)(e) which is : maintenance of a
fixed place of business solely for the purpose of carrying on, for the
enterprise, any other activity of a preparatory or auxiliary character. The
only activity of the petitioner’s liaison offices in India was to download
information which was contained on the main servers located in the UAE,
based on which cheques were drawn on banks in India whereupon the cheques
were couriered or dispatched to the beneficiaries in India, keeping in mind
the instructions of the NRI remitters. Such an activity could not be
anything but auxiliary in character. The instant activity was in “aid” or
“support” of the main activity. It fell within the exclusionary clause.

iv) The ruling rendered by the Authority proceeded on a
wrong premise, inasmuchas, it, firstly, examined the case from the point of
view of Section 5(2)(b) and Section 9(1)(i) of the Act while it was required
to look at the provisions of the DTAA for ascertaining the petitioner’s
liability to tax and, secondly, it ignored the plain meaning of the terms of
the exclusionary clause, i.e., Article 5(3)(e), while examining as to
whether setting up a liaison office in India would result in setting up a
permanent establishment within the meaning of the DTAA. The ruling of the
Authority in these circumstances being contrary to well- established
principles as well as the provisions of law, would amount to an error
apparent on the face of the record and hence, amenable to a writ of
certiorari. The ruling was liable to be quashed.”

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Special audit of accounts — Order u/s. 142(2A) cannot be passed without giving reasonable opportunity of being heard.

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 12 Special audit of accounts — Order u/s.
142(2A) cannot be passed without giving reasonable opportunity of being heard.


[Sahara India (Firm) v. CIT, (2008) 300 ITR 403 (SC)]

This matter was placed before a three-Judge Bench in view of
a common order dated December 14, 2006, passed by a two-Judge Bench. The order
read as follows :

“When the matter was taken up, the learned counsel for the
petitioner placed reliance on a decision of this Court in Rajesh Kumar v.
Deputy CIT. According to the learned counsel for the petitioner, before
any direction can be issued u/s.142(2A) of the Income-tax Act, 1961 (in short
‘the Act’) for special audit of the accounts of the assessee, there has to be
a pre-decisional hearing and an opportunity has to be granted to the assessee
for the purpose. A close reading of the decision shows that the observations
in this regard appear to have been made in the context of the assessments in
terms of S. 158BC (block assessment) of the Act. Such assessments are
relatable to a case when a raid has been conducted at the premises of an
assessee. Had that been so, limited to the facts involved in that case, we
would have negatived the contentions of the learned counsel for the
petitioner. But, certain observations of general nature have been made. The
effect of these observations appears to be that in every case where the
Assessing Officer issues a direction in terms of S. 142(2A) of the Act, the
assessee has to be heard before such order is passed. This does not appear to
us to be the correct position of law. Therefore, we refer the matter to a
larger Bench. The records be placed before the Hon’ble Chief Justice of
India for constituting an appropriate Bench.”

 


Although no specific question had been formulated for
determination by the larger Bench but from the afore-extracted order it was
discernible that the Bench had doubted the correctness of the decision of this
Court in Rajesh Kumar v. Deputy CIT, to the extent that it laid down as
an absolute proposition of law that in every case where the Assessing Officer
issues a direction u/s.142(2A) of the Act, the assessee has to be heard before
such an order is passed. In other words, the Bench of two learned Judges has
felt that it may not be necessary to afford an opportunity of hearing to an
assessee before ordering special audit in terms of S. 142(2A) of the Act. The
larger Bench after noting the legal position, was in respectful agreement with
its decision in Rajesh Kumar that an order u/s.142(2A) does entail civil
consequences. The Supreme Court after taking note of the insertion of the
proviso to S. 142(2D) w.e.f. 1-6-2007 observed that even after the obligation to
pay auditor’s fees and incidental expenses has been taken over by the Central
Govt., civil consequences would still ensue on the passing of an order for
special audit and held that since an order u/s.142(2A) does entail civil
consequences, the rule audi alteram partem is required to be observed.
The Supreme Court further held that it is well settled that the principle of
audi alteram partem can be excluded only when a statute contemplates a
post-decisional hearing amounting to a full review of the original order on
merit, which was not the case here. Accordingly, the Supreme Court reiterated
the view expressed in Rajesh Kumar’s case. The Supreme Court also noted that by
the Finance Act, 2007, a proviso to S. 142(2A) has been inserted with effect
from June 1, 2007, which provides that no direction for special audit shall be
issued without affording a reasonable opportunity of hearing to the assessee.

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Substantial question of law — Whether credit for MAT is to be allowed before charging of interest u/s.234B and u/s.234C of the Act is a question of law.

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11 Substantial question of law — Whether
credit for MAT is to be allowed before charging of interest u/s.234B and
u/s.234C of the Act is a question of law.

[ CIT v. Xpro India Ltd., (2008) 300 ITR 337 (SC)]

The following substantial question of law arose for
determination u/s.260A of the Income-tax Act, 1961.

“Whether, on the facts and in the circumstances of the
case, the Hon’ble High Court was right in allowing credit for MAT, u/s.115JAA
of the Income-tax Act, 1961, before charging interest u/s.234B and u/s.234C of
the Income-tax Act ?”

 


The Supreme Court held that the High Court erred in coming to
the conclusion that no substantial question of law arose, and consequently the
Department’s appeal was dismissed. The Supreme Court was of the view that, in
the present case, the question of interpretation of S. 234B in the context of
short payment of interest on advance tax arose for determination before the High
Court, which warranted interpretation of S. 115JAA of the 1961 Act read with S.
234B and S. 234C. The shortage in payment according to the respondent was on
account of applicability of S. 115JAA. The High Court in that connection was
required to decide the nature of the levy u/s.234B, whether the levy is penal or
mandatory. It had also not considered the judgment of the Bombay High Court in
the matter of CIT v. Kotak Mahindra Finance Ltd., (2004) 265 ITR 119. The
civil appeal was therefore allowed by the Supreme Court and the impugned
judgment was set aside with the direction to the High Court to consider the
above question in accordance with law.

 

 

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Companies — Minimum Alternate Tax — In respect of company consistently following the practice of debiting the depreciation at the rates prescribed by the Income-tax Rules, the Assessing Officer cannot for the purposes of S. 115J rework the net profit by s

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 9 Companies — Minimum Alternate Tax — In
respect of company consistently following the practice of debiting the
depreciation at the rates prescribed by the Income-tax Rules, the Assessing
Officer cannot for the purposes of S. 115J rework the net profit by substituting
depreciation at the rates prescribed in Schedule XIV to the Companies Act, 1956.


[Malayala Manorama Co. Ltd. v. CIT, (2008) 300 ITR 251
(SC)]

The main question which had arisen for consideration before
the High Court was whether in respect of a company consistently charging
depreciation in its books of account at the rates prescribed in the Income-tax
Rules, the Income-tax Officer has jurisdiction u/s.115J of the Income-tax Act,
1961, to rework net profit by substituting the rates prescribed in Schedule XIV
to the Companies Act, 1956 ? The Kerala High Court (253 ITR 378) had held that
for the purposes of S. 115J the depreciation must be calculated in terms of the
Companies Act. On an appeal to the Supreme Court, it was submitted on behalf of
the appellant that in the profit and loss account the assessee has debited
depreciation at the rates prescribed by the Income-tax Rules, 1962. This has
been the consistent practice of the assessee throughout. S. 211(2) of the 1956
Act mandates that every profit and loss account of a company shall give a true
and fair view of the profit or loss of the company for the financial year and
shall comply with the requirements of Parts II and III of Schedule VI so far as
they are applicable thereto. The accounts of the assessee for the relevant A.Ys.
1988-89 and 1989-90 are audited u/s.227 of the 1956 Act. The audit report
confirms that the accounts of the assessee represent a true and fair view. The
accounts have further been passed and approved by the general body of
shareholders at the annual general meeting. The said accounts have been filed
with the Registrar of Companies and no objections have been raised in relation
to them. It was further submitted that u/s.115J the assessee has the obligation
to prepare his profit and loss account as per Parts II and III of Schedule VI to
the 1956 Act. No dispute has been raised at any stage of the proceedings by the
Revenue that the profit and loss account of the assessee is not in compliance
with the provisions of the 1956 Act, particularly Schedule VI, Parts II and III.
In Schedule VI, there is no reference to S. 205 and S. 350 or Schedule XIV to
the 1956 Act. The appellant referred to Note 3(iv) of Part II (Requirements as
to profit and loss account) of Schedule VI to the 1956 Act which reads as
under : “(iv) The amount provided for depreciation, renewals or diminution in
value of fixed assets. If such provision is not made by means of a depreciation
charge, the method adopted for making such provision. If no provision is made
for depreciation, the fact that no provision has been made shall be stated and
the quantum of arrears of depreciation computed in accordance with S. 205(2) of
the Act shall be disclosed by way of a note”. It was submitted that this made it
clear that Schedule VI to the 1956 Act does not create any obligation on a
company to provide for any depreciation much less provides for depreciation as
per Schedule XIV to the Act. It was also submitted by the appellant that it is a
long-standing accepted position by the Company Law Department that the rates of
depreciation prescribed in Schedule XIV are the minimum rates (See : Circular
No. 2 of 1989, dated Mach 7, 1989). Paragraph (3) of the said Circular reads as
under :

“(3) Can higher rates of depreciation be charged ?

It is stated that Schedule XIV clearly states that a
company should disclose depreciation rates if they are different from the
principal rates specified in the Schedule. On this basis, it is suggested that
a company can charge depreciation at rates which are lower or higher than
those specified in Schedule XIV. It may be clarified that the rates as
contained in the Schedule XIV should be viewed as the minimum rates and,
therefore, a company shall not be permitted to charge depreciation at rates
lower than those specified in the Schedule in relation to assets purchased
after the date of applicability of the Schedule.”

 


Moreover, Note 5 of Schedule XIV contemplates that rate may
be different from the rates specified in the said Schedule. This note reads as :

“5. The following information should also be disclosed in
the accounts :

(i) depreciation methods used; and

(ii) depreciation rates or the useful lives of the
assets, if they are different from the principal rates specified in the
Schedule.”

 



It was submitted by the learned counsel on behalf of the
appellant that this case was squarely covered by a three-Judge Bench decision of
this Court in Apollo Tyres Ltd. v. CIT, (2002) 9 SCC 1. Referring to
Explanation (ha)(iv) to S. 115J, the Revenue submitted that before the High
Court, it was argued by counsel for the Revenue that S. 205 of the Companies
Act, 1956 has been legislatively incorporated into the Income-tax Act for the
purposes of S. 115J and since this is a legislation by incorporation, the said
provision of the Companies Act, 1956, has to be applied as indicated by that
provision in the Companies Act. It was also pointed out that in S. 205 of the
Companies Act, it has been provided that for the purposes of calculating
depreciation u/s.205(1), the same could be provided to the extent specified
u/s.350 of the Companies Act. A reference to S. 350 of the Companies Act would
show that the amount of depreciation to be deducted shall be the amount,
calculated with reference to the written-down value of the assets, as shown by
the books of the company at the end of the financial year expiring at the
commencement of the Act or immediately thereafter and at the end of each
subsequent financial year and the rates specified in Schedule XIV to the
Companies Act. Therefore, according to the Revenue, the calculation of
depreciation in terms of the Companies Act and Schedule XIV thereof becomes a
must, while assessing an assessee u/s.115J of the Income-tax Act.

The Supreme Court allowing the appeal of the appellant, held
that the controversy involved in this case was no longer res integra. Its
three-judge Bench in Apollo Types (supra) had clearly interpreted S. 115J
of the Act and there was no scope for any further discussion.

 

 

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Transfer of a case — Power u/s.127 can also be exercised in respect of a block assessment.

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 10 Transfer of a case — Power u/s.127 can
also be exercised in respect of a block assessment.


[ K. P. Mohammed Salim v. CIT, (2008) 300 ITR 302
(SC)]

A search was conducted by the officers of the Income-tax
Department in the residence as also in the business premises of the assessee,
his sons and other associates, consequent whereupon, it was proposed to transfer
the cases pertaining to the assessee to the Income-tax (Inv.) Circle, Calicut,
to facilitate effective and co-ordinated investigation. An order was passed to
that effect by the Chief Commissioner of Income-tax, Bangalore, u/s.127(2) of
the Act. A notice was issued by the Assessing Officer u/s.158 BC of the Act to
file a return setting forth the total income including the undisclosed income
for the block period. The assessee filed a writ petition in the High Court of
Karnataka challenging the said order of transfer of cases passed by the Chief
Commissioner of Income-tax. The said writ petition was dismissed. A notice was
thereafter issued by the assessing authority asking the assessee to file a
return setting forth the total income including the undisclosed income for the
block period. Pursuant thereto, the return was filed. The purported undisclosed
income of the assessee was determined. The said order of the Assessing Officer,
Calicut was challenged on the ground that he had no jurisdiction to make the
block assessment, as the authority therefor remained with the Assessing Officer
originally having the jurisdiction over the assessee. A Division Bench of the
High Court by reason of the impugned judgment opined that the provisions of S.
127 of the Act can also be resorted to for a block assessment. On an appeal, the
Supreme Court held that an order of transfer is passed for the purpose of
assessment of income. It serves a larger purpose. Such an order has to be passed
in public interest. Only because in the said provision the words ‘any case’ has
been mentioned, the same, in the opinion of the Supreme Court, would not mean
that an order of transfer cannot be passed in respect of cases involving more
than one assessment year. It would not be correct to contend that only because
Explanation appended to S. 127 refers to the word ‘case’ for the purpose of the
said Section as also S. 120, the source of power for transfer of the case
involving block assessment is relatable only to S. 120 of the Act. It is a
well-settled principle of interpretation of statutes that a provision must be
construed in such a manner as to make it workable. When the Income-tax Act was
originally enacted, Chapter XIV-B was not in the statute book. It was brought in
the statutes book only in the year 1996. The power of transfer in effect
provides for a machinery provision. It must be given its full effect. It must be
construed in a manner so as to make it workable. Even S. 127 of the Act is a
machinery provision. It should be construed to effectuate a charging Section so
as to allow the authorities concerned to do so in a manner wherefor the
statute was enacted. Affirming the decision the Andhra Pradesh High Court in
Mukutla Lalita v. CIT reported in (1997) 226 ITR 23 the Supreme Court held
that the word ‘any’ must be read in the context of the statute and for the said
purpose, it may in a situation of this nature, means all. The Supreme Court held
that the power u/s.127 can also be exercised in respect of a block assessment.

 

 

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Appeal — Appeals of Revenue cannot be entertained if it has accepted and not challenged the ruling of the High Court passed on the issue.

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 8 Appeal — Appeals of Revenue cannot be
entertained if it has accepted and not challenged the ruling of the High Court
passed on the issue.


[ ACIT v. Surat City Gymkhana, (2008) 300 ITR 214
(SC)]

The respondent-assessee claimed exemption u/s. 10(23) of the
Income-tax Act, 1961, for the A.Ys. 1991-92 and 1992-93. The said exemption was
claimed on the basis that the objects of the respondent-assessee were
exclusively charitable. The Assessing Officer rejected the claim. The appeals
filed before the Commissioner of Income-tax (Appeals) were dismissed. Aggrieved
thereby, the assessee filed further appeals before the Tribunal. The Tribunal,
by its order dated January 20, 2000, allowed the
appeals filed by the respondent-assessee. The Revenue filed appeals before the
High Court of Gujarat. The Revenue claimed that the following two substantial
questions of law arise from the order of the Tribunal :

(A) Whether, on the facts and circumstances of the case,
the Income-tax Appellate Tribunal was justified in law in holding that the
objects of the trust restricting benefits to the members of the club would
fall within the purview of the act of ‘general public utility’ u/s.2(15) of
the Income-tax Act constituting as a section of public and not a body of
individuals ?

(B) Whether, on the facts and circumstances of the case,
the Income-tax Appellate Tribunal was justified in law in holding that
registration u/s.12A was a fait accompli to hold the AO back from
further probe into the objects of the trust ?

 


The High Court dismissed the appeals, in limine,
relying on a decision of the same Court in the case of Hiralal Bhagwati v.
CIT, (2000) 246 ITR 188; (2000) 161 CTR 401. Being dissatisfied by the order
of the High Court, the Revenue has filed these appeals. The Supreme Court, on
July 22, 2002, granted leave in respect of question No. ‘B’ only. The appeals
were not entertained in respect of the question No. ‘A’ and it was noted that
the appeals were rightly dismissed by the High Court insofar as question No. ‘A’
is concerned, as the appellant did not challenge the correctness of the judgment
in the case of Hiralal Bhagwati (supra). At the hearing the Supreme Court
found that on a perusal of the judgment of the Gujarat High Court in the case of
Hiralal Bhagwati (supra), question No. ‘B’ was also concluded by the said
judgment (for 1st para of page 196). Further, since the Revenue had not
challenged the decision in the said case, the same has attained finality. The
Supreme Court held that question No. ‘B’, therefore, should also meet the same
fate as question No. ‘A’, as this Court had declined to grant leave in respect
of question No. ‘A’ on the ground that the Revenue did not challenge correctness
of the decision in the case of Hiralal Bhagwati (supra). It appeared that
the fact that question No. ‘B’ was also covered by the aforementioned judgment,
was not brought to the notice of their Lordships and, therefore, leave granted
was restricted to question No. ‘B’. In this view of the matter, the appeals were
dismissed.

 

 

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Reference — Penalty — High Court cannot go into facts in the absence of the question that the finding of the Tribunal was perverse.

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 7 Reference — Penalty — High Court cannot go
into facts in the absence of the question that the finding of the Tribunal was
perverse.


[Sudarshan Silks and Sarees v. CIT, (2008) 300 ITR 205
(SC)]

A search was conducted on the premises of the assessees on
October 14/15, 1987, and incriminating documents evidencing concealment of
income by the assessee were unearthed apart from cash and jewellary found at the
time of search. It was found that the appellant was maintaining double set of
books and was accounting for only 50% of sales in the regular set of books. This
fact was admitted by Shri J. S. Ramesh, a partner of the firm in the statement
recorded u/s.132(4) of the Act. Shri J. S. Ramesh was the person-in-charge of
the entire group. The total turnover suppressed by the assessee for the A.Y.
1987-88 was found to be to the tune of Rs.44,07,783. The AO estimated that the
sales of the assessee were Rs.50,000 per day, whereas the accounted sales were
not found even 50% of the total sales. Apart from this, it was found that
certain purchases were also not being accounted for. Similarly, certain payments
made were not being accounted for. All these were pointed out to the assessee.
The assessee filed a revised return on March 31, 1989, declaring a total income
for the A.Y. 1987-88 at Rs.3,74,226 as against the earlier amount of Rs.43,650.
This was accepted and after verification the assessment was completed on
December 29, 1989. During the course of recording the statement u/s.132(4) of
the Act, Shri Ramesh agreed to declare such additional income as had been
estimated by the search party in the office of the appellant and its sister
concerns. On the basis of these calculations, revised returns were filed by the
appellant for A.Ys. 1984-85, 1985-86 and 1986-87. The incomes as per revised
returns were also accepted in toto. In the course of assessment proceedings,
penal action u/s.271(1)(c) of the Act was initiated and after considering the
reply filed by the appellant, the AO chose to levy maximum penalty u/s.
271(1)(c). On appeal the CIT(A) noticed that no books of account or other
documentary evidence was discovered that proved any concealment for the earlier
years. The CIT(A) held that no penalty is leviable when unproved income is
offered to purchase peace, particularly considering that the additional income
returned, has only been on the basis of the appellant’s own estimates and the
appellant’s own admission, unsupported by the discovery of any other documentary
evidence relevant to years for which higher incomes were returned. The Tribunal
upheld the findings recorded by the CIT(A). The High Court on consideration of
the matter concluded that the findings recorded by the Tribunal and the CIT(A)
being perverse, which no reasonable person could have taken, were liable to be
set aside and accordingly accepted the reference and held that in the facts and
circumstances of the case, the Tribunal was not right in upholding the order of
the CIT(A) in cancelling the penalty levied u/s.271(1)(c). It was held that in
the facts of the case the penalty u/s. 271(1)(c) is clearly exigible. On appeal
the Supreme Court held that the question of law referred to the High Court for
its opinion was, as to whether the Tribunal was right in upholding the findings
of the Commissioner of Income-tax (Appeals) in cancelling the penalty levied
u/s.271(1)(c). Question as to perversity of the findings recorded by the
Tribunal on facts was neither raised nor referred to the High Court for its
opinion. The Tribunal is the final court of fact. The decision of the Tribunal
on the facts can be gone into by the High Court in the reference jurisdiction
only if a question has been referred to it which says that the finding arrived
at by the Tribunal on the facts is perverse, in the sense that no reasonable
person could have taken such a view. In reference jurisdiction, the High Court
can answer the question of law referred to it and it is only when a finding of
fact recorded by the Tribunal is challenged on the ground of perversity, in the
sense set out above, that a question of law can be said to arise. Since the
frame of the question was not as to whether the findings recorded by the
Tribunal on facts were perverse, the High Court was precluded from entering into
any discussion regarding the perversity of the findings of fact recorded by the
Tribunal. Accordingly, the orders under appeal were set aside by the Supreme
Court and that of the Commissioner of Income-tax (Appeals) and the Tribunal
restored.

 

 

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Double Taxation Avoidance Agreement — India and Malaysia — Dividend income received from Malaysian company is not liable to be taxed in India in the hands of the recipient assessee

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6 Double Taxation Avoidance Agreement — India
and Malaysia — Dividend income received from Malaysian company is not liable to
be taxed in India in the hands of the recipient assessee.


[Dy. CIT v. Torqouise Investments and Finance Ltd., (2008) 300 ITR 1
(SC)]

The assessee-respondent, filed its return of income for the
A.Y. 1992-93, declaring an income of Rs.4,30,06,580 by showing its business as
investment and finance, which was processed u/s.143(1)(a) of the Income-tax Act,
1961, on January 18, 1996, on the same income. Along with the return the
assessee claimed refund amounting to Rs.29,16,660 on the basis of credit of
deemed TDS on dividend received from a Malaysian company i.e., Pan
Century Edible Oils SND.BHD, Malaysia. The Assessing Officer raised a demand of
Rs.1,07,370 after rejecting the credit claimed by the assessee on the basis of
deemed credit on dividend received from the aforesaid Malaysia company. Being
aggrieved, the assessee filed an appeal before the Commissioner of Income-tax
(Appeals), which was accepted. The Revenue thereafter filed an appeal before the
Income-tax Appellate Tribunal. The Tribunal disposed of the appeal with the
observation that the Double Taxation Avoidance Agreement entered into by the
Government of India with Government of Malaysia would override the provision of
the Act if they are at variance with the provisions of the Act. It was held that
from a plain reading of Article XI of the DTAA, it was clear that dividend
income would be taxed only in the Contracting State where such income accrued.
On further appeal, the High Court, following the decision of the Madras High
Court in the case of CIT v. Vr. S.R.M. Firm reported in (1994) 208
ITR 400, which was affirmed by the Supreme Court in the case of CIT v.
P.V.A.L. Kulandagan Chettiar reported in (2004) 267 ITR 654, held that the
Tribunal was justified in holding that the dividend income derived by the
assessee from a company in Malaysia is not liable to be taxed in the hands of
the assessee in India under any of the provisions of the Act. On an appeal to
the Supreme Court, the Supreme Court after going through the judgment of the
Madras High Court in CIT v. Vr. S.R.M. Firm (1994) 208 ITR 400 and its
judgment in CIT v. P.V.A.L. Kulandagan Chettiar (2004) 267 ITR 654 held
that the point involved in the appeals stood concluded in favour of the assessee
and against the Revenue by the decision of the Madras High Court in CIT v. Vr.
S.R.M. Firm (1994) 208 ITR 400, which was duly affirmed by it in the case of
CIT v. P.V.A.L. Kulandagan Chettiar (2004) 267 ITR 654. The Supreme Court
further observed that the review petition filed against the decision of this
Court in CIT v. P.V.A.L. Kulandagan Chettiar (2004) 267 ITR 654 was also
dismissed on November 1, 2007.

 

Notes :

(i) There was an inordinate delay of 1027 days in filing
the review petition for which no satisfactory explanation had been offered.
The Supreme Court even otherwise did not find any ground to entertain the said
petition (2008) 300 ITR 5 (SC).

(ii) The effect of the judgment of the Apex Court in the
case of Kulandagan Chettiar (267 ITR 654) should now be considered with the
Notification (No. 91 of 2008, dated 28th August, 2008) issued u/s.90(3)
dealing with the scope of words ‘may be taxed’ used in DTAAs — [218 CTR (St.)
13].

 

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Illustration of an audit report containing large number of qualifications : Mahanagar Telephone Nigam Limited (31-3-2009)

Expenditure : Capital or revenue : S. 37 of I. T. Act 1961 : A. Y. 2002-03 : Amount spent on computer software is revenue expenditure.

New Page 1

  1. Expenditure : Capital or revenue : S. 37 of I. T. Act
    1961 : A. Y. 2002-03 : Amount spent on computer software is revenue
    expenditure.



 


[CIT vs. Varinder Agro Chemicals Ltd.; 309 ITR 272
(P&H)].

For the A. Y. 2002-03, the Assessing Officer disallowed the
claim of the appellant for deduction of the expenditure on acquisition of
computer software holding that it is capital in nature on the ground that
enduring advantage was derived by the assessee by incurring such expenditure.
The Tribunal allowed the assessee’s claim.

On appeal by the Revenue, the Punjab and Haryana High Court
upheld the decision of the Tribunal and held as under :

“There is nothing to show that the software used by the
assessee was of enduring nature and will not become outdated. Since
technology is fast changing and day by day systems are being developed in a
new way, software may be needed like raw material. The view taken by the
Tribunal is certainly a possible view.”

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Assessment : Extension of period of limitation : S. 150 of I. T. Act, 1961 : A. Y. 1993-94 : Grant of probate to assessee would not extend the period.

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Assessment : Extension of period of limitation : S. 150
of I. T. Act, 1961 : A. Y. 1993-94 : Grant of probate to assessee would not
extend the period.


Reported :

 

[CIT vs. Smt. Shobha Rani Shah : 309 ITR 263 (P &
H)]

The assessee had received the probate of her mother on
30.11.2000. On the basis of the probate the Assessing Officer issued notice
u/s. 148 of the Income-tax Act, 1961, on 31.03.2005 for the A. Y. 1993-94. The
Assessing Officer held that the period of limitation would not be applicable
in view of the provisions of Section 150 of the Act. The Commissioner
(Appeals) held that the effective date for invoking Section 150(1) was the
date of probate of the mother and consequently held that the notice u/s. 148
was beyond the period of limitation. The Tribunal dismissed the appeal filed
by the Revenue holding as follows :

” . . . . once I have held that no finding or direction
was given by the Hon’ble Judge in his order, the issue of notice u/s. 148 is
to be regulated by Section 149 of the Income-tax Act as in the order passed
by the Hon’ble Judge there is no finding or direction to be basis for a
notice within the extended period u/s. 150(1).”

On appeal by the Revenue, the Delhi High Court upheld the
decision of the Tribunal and held as under :

“In the present case, the Tribunal has rightly held that
the grant of probate by the Additional District Judge, Rohtak, had no
consequence to the assessment and that the order dated 30.11.2000, would not
cause the limitation to extend u/s. 150 of the Act.”

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Interest on borrowed funds : Deduction u/s.36(1)(iii) of I. T. Act, 1961: A. Y. 1997-98 : Borrowed funds used for purchase of shares held partly as investment and partly as stock in trade : Shares purchased for acquiring controlling interest in company :

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Interest on borrowed funds : Deduction u/s.36(1)(iii) of
I. T. Act, 1961: A. Y. 1997-98 : Borrowed funds used for purchase of shares
held partly as investment and partly as stock in trade : Shares purchased for
acquiring controlling interest in company : Interest on borrowed funds
allowable as deduction u/s. 36(1)(iii).


 



[CIT vs. Srishti Securities Pvt. Ltd. (Bom); ITA No.
71 of 2006: Dated 22.01.2009].

The assessee had purchased shares out of borrowed funds.
The shares were held partly as investment and partly as stock in trade. The
assessee’s claim for deduction of interest was rejected by the Assessing
Officer on the ground that the primary object of acquiring shares was not to
earn dividend but to acquire controlling interest in the company. The CIT(A)
bifurcated interest on pro rata basis between investment and stock in
trade and allowed the interest attributable to stock in trade. The Tribunal
allowed the assessee’s claim, holding that the interest is allowable u/s.
36(1)(iii).

On appeal by Revenue, the Bombay High Court followed the
judgment in the case of CIT vs. Lokhandwala Construction Industries Ltd.
260 ITR 579 (Bom), concurred with the judgment of the Calcutta High Court
in CIT vs. Rajeeva Lohana Kanoria 208 ITR 616 (Cal) and upheld the
decision of the Tribunal. The High Court held that the interest which was
disallowed to the extent of investment will have to be allowed as held by the
Tribunal.

Editor’s Note :

This related to an assessment year prior to insertion of
S.14A.


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Cash credit : Undisclosed income : S. 68 of I. T. Act, 1961 : Disclosure of diamonds in declaration under VDIS : Subsequent sale of diamonds and receipt of consideration by cheque : Receipts shown in books of account is not undisclosed income.

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Cash credit : Undisclosed income : S. 68 of I. T. Act,
1961 : Disclosure of diamonds in declaration under VDIS : Subsequent sale of
diamonds and receipt of consideration by cheque : Receipts shown in books of
account is not undisclosed income.



 


[CIT vs. Inder V. Nankani (Bom); ITA No. 128 of
2009 : Dated 24.02.2009].

The assessee had disclosed diamonds in a declaration under
VDIS. He subsequently sold the said diamonds and received consideration by
cheque. The amount received was shown in the books of account. The Assessing
Officer treated the sale consideration as undisclosed income and made addition
of the said amount to the total income of the assessee. The Assessing Officer
held that the assessee was unable to prove that he was actually in possession
and ownership of the diamonds. It is the case of the Revenue that these were
hawala transactions which were unearthed on the raid being conducted on the
two chartered accountants. The Tribunal deleted the addition.

On appeal by the Revenue, the Bombay High Court upheld the
decision of the Tribunal and held as under :

“i) The entire submission on behalf of the Revenue is
that the first purchaser has in fact sold the diamonds to the second
purchaser whose whereabouts could not be traced and as such, the sale was
fictitious. The question is whether the order of the CIT(A) and ITAT suffers
from any error of law.

ii) In the instant case, admittedly the diamonds were
declared. The declaration was accepted by the Revenue and thereafter, the
assessee had paid the tax. The assessee thereafter had sold the said
diamonds and received consideration which is also disclosed in the books of
account. In these circumstances, the finding recorded by the Tribunal cannot
be faulted, namely, that the assessee had proved the possession of the
jewellery or diamonds at the time of declaration.

iii) In the instant case, the Assessing Officer was given
an opportunity to produce any material in his possession to hold to the
contrary. The Assessing Officer failed to comply with the said direction. In
these circumstances, CIT(A) proceeded to pass the order which order came to
be subsequently affirmed by the ITAT.

iv) The Tribunal in the instant case has held that the
assessee had disclosed the diamonds in his possession at the time of VDIS
declaration which was accepted. Once that be the case and the consideration
received from the purchaser which has not been doubted, the fact that there
is doubt about the second sale, cannot result in making addition in the
hands of the assessee.

v) In our opinion, considering the findings of facts in
the case, this is not a fit case where question of law would arise.”

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Export profit : Deduction u/s. 80HHC of I. T. Act, 1961 : Export turnover and total turnover : Export sale price to be modified as per the approval by the RBI for including in the export turnover.

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Export profit : Deduction u/s. 80HHC of I. T. Act, 1961
: Export turnover and total turnover : Export sale price to be modified as per
the approval by the RBI for including in the export turnover.



 


[CIT vs. M/s. Polycot Corporation (Bom); ITA No.
1241 of 2008: Dated 23.01.2009.]

In the appeal filed by the Revenue against the order of the
Tribunal, the Department had raised the following question :

“Whether on the facts and in the circumstances of the
case and law, is the Hon’ble ITAT right in directing the A.O. to compute the
deduction u/s. 80HHC of the Act after the books of account having been
closed/made up with the total export turnover ascertained, holding that the
reduction in the invoice amount having been approved by the RBI, the
original sales price stands modified to this extent and such modified price
only should be included as part of export turnover ?”

The Bombay High Court held as under :

“i) To avail of the benefit of Section 80HHC the proceeds
have to be brought into India within the time prescribed i.e., six
months or such extended period as may be allowed. In the instant case the
RBI granted time up to 30th June, 2001. The proceeds were brought into India
on 30 June, 2001.

ii) Here we may set out the areas of disagreement between
the Revenue and the assessee. It is the contention of the assessee that
while working out total turnover what will have to be considered is the
revenue which has been brought in during the course of that financial year
and if any moneys in respect of export proceeds have come subsequent to the
order of assessment, they will have to be considered in the said financial
year.

iii) The other factual aspect of the matter is that the
buyer proposed deduction in the export price, the respondents agreed to the
same after taking approval of the RBI to the extent of 30%. The respondents
are a totally export oriented unit. Moneys, therefore, in terms of the
approval granted by the RBI were brought in during the period as extended.

iv) The Tribunal in its order observed that once the RBI
has agreed to deduction in the invoice amount, the original sales price
stands modified and such modified price only should be taken as actual
export value. It is further observed that such adjusted export value should
only be included in the export turnover and the total turnover.

v) The contention of the Revenue was that, that should be
excluded from the export turnover.

vi) In our opinion, considering the facts and the
provisions of Section 80HHC, we cannot find fault with the conclusion
arrived at by the learned Tribunal.”

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Business expenditure : Deduction u/s. 37(1) of I. T. Act, 1961 : A. Ys. 1996-97 and 2001-02 : Expenditure on production of films for advertisement of products manufactured by assessee : Is business expenditure allowable u/s. 37(1) ?

New Page 1

Business expenditure : Deduction u/s. 37(1) of I. T.
Act, 1961 : A. Ys. 1996-97 and 2001-02 : Expenditure on production of films
for advertisement of products manufactured by assessee : Is business
expenditure allowable u/s. 37(1) ?



 


[CIT vs. Geoffrey Manners & Co. Ltd. (Bom); ITA No.
789 of 2008: Dated 09.02.2009].

The assessee incurred expenditure on production of films
for the purpose of advertisement for marketing the products manufactured by
it. The Assessing Officer disallowed the claim for deduction of the
expenditure, holding that it is capital in nature. The Tribunal allowed the
claim.

On appeal by the Revenue, the Bombay High Court upheld the
decision of the Tribunal and held as under :

“i) A similar issue had come up for consideration before
the Punjab & Haryana High Court in CIT vs. Liberty Group Marketing
Division, 2008 (8) DTR Judgments 28. In that case the assessee had
claimed expenditure incurred on glow signboards, as also T. V. Films. The
expendi-ture was held to be revenue in nature.

ii) In our opinion the correct test to be applied in such
a case would be that if the expenditure is in respect of an ongoing business
of the assessee and there is no enduring benefit, it can be treated as
revenue expenditure. However, if it is in respect of business which is yet
to commence, then the same cannot be treated as revenue expenditure, as
expenditure is on a product yet to be marketed.

iii) The Tribunal on the facts of this case was clearly
within its jurisdiction in holding that the expenditure was by way of
revenue expenditure, as it was in respect of promoting ongoing products of
the assessee herein.”

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Bad debt : Deduction u/s. 36(1)(vii) of I. T. Act, 1961 : After amendment w.e.f. 01.04.1989 it is not obligatory on the part of the assessee to prove that the debt written off is indeed a bad debt for the purpose of deduction u/s. 36(1)(vii).

New Page 1

Unreported :

  1. Bad debt : Deduction u/s.
    36(1)(vii) of I. T. Act, 1961 : After amendment w.e.f. 01.04.1989 it is not
    obligatory on the part of the assessee to prove that the debt written off is
    indeed a bad debt for the purpose of deduction u/s. 36(1)(vii).

 

[DI vs. M/s. Oman International Bank, SAOG (Bom);
ITA No. 114 of 2009; Dated 09.02.2009.]

At the instance of the Revenue the following question was
raised before the Bombay High Court :

“Whether as per the existing provisions even after the
amendment w.e.f. 01.04.1989, is it obligatory on the part of the
assessee to prove that the debt written off by him is indeed a Bad Debt for
the purpose of allowance u/s. 36(1)(vii) ?”

The Bombay High Court answered the question as under :

“The question as framed will have to be answered by
holding that after the amendment it is neither obligatory nor is it a burden
on the assessee to prove that the debt written off by him is indeed a bad
debt as long as it is bona fide and based on commercial wisdom or
expediency.”

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Business Combinations (IFRS 3) — Accounting to reflect the economic substance

IFRS impact on fixed assets — More than just a change in name

Accounting for property, plant and equipment

    IAS 16 deals with accounting for property plant and equipment; widely referred to as PPE under IFRS. PPE comprises tangible assets held by a company for use in production or supply of goods or services, for rental to others, or for administrative purposes, that are expected to be used for more than one period. PPE is recognised only if it is probable that future economic benefits associated with the asset will flow to an entity and the cost of the asset can be reliably measured. IAS 16 requires PPE to be initially recognised at cost plus ‘directly attributable’ expenses incurred to bring an asset to the location and condition necessary for its ‘intended use’.

    In practice there may be situations where the determination of what comprises ‘directly attributable cost’ would involve exercise of judgment.

Directly attributable costs :

    At a general level, the concept of directly attributable costs in AS 10 is broadly consistent with what is provided by IAS 16. IAS 16 has provided examples of directly attributable costs. Some of these include :

  •      Installation and assembly cost

  •      Site preparation

  •      Fees paid to professionals e.g. towards legal assistance for title report on land

  •      Cost of employee benefits incurred for acquisition/construction of an asset e.g. share based payments provided to employees who have worked on the construction/acquisition of an asset

  •      Interest and other borrowing costs can be capitalised as part of the cost of a qualifying asset

    These costs need to be incremental or external to be considered as directly attributable. For example : if a company is installing a machine in its factory and one of its engineers has been assigned this task on a full time basis then the cost of the engineer including employee benefits during the period of installation should be included in the cost of the machine even though this cost may have been incurred in any event. In any case, the cost of an asset can include expenditure only if an asset is acquired e.g. if a broker is paid fees to identify property, such fees can be added to the cost of property which is acquired since it is directly attributable to the acquisition of property, fees paid for other properties not acquired needs to be expensed.

    Care should be taken to ensure that expenses which are in the nature of administrative costs are not capitalised since these cannot be considered as directly attributable to acquisition of an asset. Also, abnormal amounts of material/labour/other costs that maybe incurred while constructing an asset cannot be added to the cost of that asset. These will have to be expensed in the period in which these have been incurred. The determination of what comprises ‘abnormal’ is subjective. For example, if the normal commissioning time for an asset is two weeks but it takes four weeks because a trainee engineer had installed a machine incorrectly or because site management forgot to schedule machine operators for the testing phase, then additional costs incurred as a result of such events should be considered ‘abnormal’ and expensed as incurred. However, the assessment of what is abnormal can be made by considering the level of technical difficulty associated with a project, timelines/estimates made at the time of planning etc. Having said that, there may be circumstances where there might be a delay in the process of constructing an asset due to some unexpected technical difficulties. This delay may give rise to additional costs being incurred which should then be capitalised and not expensed.

    As is the case with AS 10, IAS 16 also permits subsequent expenditure to be capitalised only if it is probable that future economic benefits associated with them will flow to the entity and its cost can be reliably measured.

Areas of GAAP difference : AS 10 v. IAS 16 :

    The accounting for PPE as required by IAS 16 is similar to accounting for fixed assets as per AS 10 in certain areas, while there are certain important differences such as :

  •     Foreign exchange differences and preoperative expenses capitalised under Indian GAAP
  •      Accounting for decommissioning costs
  •     Depreciation
  •      Component accounting
  •      Revaluation approach for subsequent measurement of PPE

Foreign exchange differences and preoperative expenses capitalised under Indian GAAP :

    Under Indian GAAP, (based on principles laid out in the Companies Act 1956), companies have traditionally capitalised foreign exchange differences on monetary items relating to fixed assets as part of the acquisition cost. This has been recently amended by the Accounting Standard Rules 2006. However, prior capitalisation of foreign exchange differences still forms a part of the cost of fixed asset. On adoption of IFRS, companies need to strip out these capitalised exchange differences on the transition date so as to bring the cost of assets in line with IAS 16 and also rework depreciation for future years accordingly.

    It is important to note here that as per the recent March 2009 notification issued by the Ministry of Company Affairs, Indian companies have an option to adjust exchange differences arising on reporting of long term foreign currency monetary items to the cost of the fixed asset where they relate to the acquisition of a depreciable capital asset and consequently depreciated over the asset’s balance life. Such an option would not be available under IFRS and hence such capitalisation would also need to be adjusted on transition to IFRS.

The same rule applies to general and administrative overheads relating to start up activities capitalised under Indian GAAP as per Guidance note on expenditure during construction period, until the year 2008. These would also have to be stripped out from the cost of the PPE with a corresponding impact on opening reserves on the transition date.

Decommissioning:

Under IFRS, the cost of an asset also includes  the estimated cost of dismantling an asset and restoring the site. For example, consider that the installation and testing of a company’s new chemical plant results in contamination of the ground at the plant. The company will be required to clean up the contamination caused by the installation when the plant is dismantled. Hence it will recognise a provision for restoration, which is capitalised as part of the cost of the asset. Subsequent changes to these estimates due to change in the amount or timing of the expenditure are required to be accounted as change in estimates. Although AS 10 does not provide guidance on accounting for decommissioning costs, Appendix C to AS 29 provides an example of cost of restoring an oil rig at the end of production. Such costs are required to be included as part of the cost of oil rig. The key GAAP differences here are:

  • IFRS requires recognition of provisions based on constructive obligations also as opposed to only contractual obligations under Indian GAAP

  • Under  IFRS, such  provisions  need  to be recorded based on their discounted  values

Depreciation:   

Under IFRS,entities will have to estimate depreciation based on the estimated useful life of an asset. This is different from the current practice of using rates prescribed by Schedule XIV to the Companies Act, 1956 as the minimum rates for providing depreciation. IFRS does not prescribe any particular method of calculating depreciation but permits use of the straight line method, diminishing balance method and sum of units method. IAS 16 also requires a review of the estimated useful life of an asset, estimated residual value of an asset and the method of depreciation at each balance sheet date. Although AS 6 also requires estimated useful life ot'” major classes of depreciable assets to be periodically reviewed, given the current practice of using Schedule XIV rates for providing depreciation, this may be an area of focus for preparers and auditors while signing off on financial statements prepared under IFRS. Based on our recent conversion experiences we have noted differences in depreciation because the useful life of major property, plant and machinery is longer than the maximum lives permitted under Schedule XIV. In other cases, companies may not necessarily have estimated useful lives, but may have adopted the Schedule XIV rates, which may not correctly reflect the useful lives (for example, furniture and vehicles being depreciated over inappropriately long lives). In such cases, application of IFRS would result in assessment of useful lives and higher depreciation rates and depreciation charge.

Irrespective of the method of depreciation followed, entities will have to ensure that the cost or revalued amount of an asset is allocated on a systematic basis over the useful life of an asset.

The residual value, the useful life and the depreciation method used must be reviewed at least at each financial year-end. Any changes are accounted for prospectively by adjusting the depreciation charge for current and future periods from the date of the change in estimate. It is noteworthy here that if a change of depreciation method has to be made, the change should be accounted for as a change in accounting estimate, and not as a change in accounting policy, and the depreciation charge for the current and future periods should be adjusted accordingly.

Component accounting:

IAS 16 requires component accounting to be fol-lowed for assets which have individual significant components and for which different rates or methods of depreciation are appropriate. The separate component may be a physical component or non physical component. An example of a physical component is an aircraft engine. An aircraft engine is a significant physical component with a distinctly different useful life. Whilst an aircraft is depreciated over its useful life, its engine is separately depreciated on the basis of estimated flying hours. An example of a non physical component is where major overhaul costs are required to be incurred on a periodic basis. If a ship costing Rs.I00 is acquired with a useful life of 15 years and if it has to be dry-docked after every three years for a major overhaul at a cost of Rs 30 then the cost of ship is split into two components i.e. non physical component of Rs 30 and other components aggregating to Rs 70. The non physical component in this case is depreciated over its useful life of 3 years and the other components will be depreciated over their useful life of 15 years.

Component accounting does not apply only to specific assets like ships or aircrafts. A single plant and machinery comprising of different parts such as melting furnace, grinders, rolling mills, etc. could have different useful lives for these parts and hence need to follow component accounting. Similarly, a building can be broken into different components
 
like the roof top, basic structure and interior improvements which could have different useful lives. The key here is to assess firstly whether there are different components in one asset and then whether these different components have significantly different useful lives.

In many cases an entity acquires an asset for a fixed sum without knowing the cost of the individual components. In such cases, the cost of individual components should be estimated either by reference to current market prices (if possible), in consultation with the seller or contractor, or using some other reasonable method of approximation.

Generally Indian companies have depreciated all assets within a class using a uniform depreciation rate (for example, a single rate for all plant and machinery). However, useful lives of different types of plant and machinery may be different – and hence the need to use different depreciation rates under IFRS.

Revaluation approach for subsequent measurement of PPE:

PPE can be measured at fair value if its fair value can be reliably measured. If the revaluation approach is chosen then:

  • All assets in that class of assets (being revalued) will have to be revalued. Class of assets would include assets which are of a similar nature and use in an entity’s operations

  • Carrying value of assets under the revaluation model should not be materially different from their fair values

Any surplus arising on the revaluation is recognised directly in the revaluation reserve within equity except to the extent that the surplus reverses a previous revaluation deficit on the same asset recognised in profit and loss, in which case the credit to that extent is recognised in profit and loss. Any deficit on revaluation is recognised in profit or loss except to the extent that it reverses a previous revaluation surplus on the same asset, in which case it is taken directly to the revaluation reserve. Therefore, revaluation increases and decreases cannot be offset, even within a class of assets.

Fair value of an asset is its market value and is the highest possible price that could be obtained for that asset without regard to its existing use.

The frequency of revaluations depends upon the volatility of the movements in the fair values of the items of PPE being revalued. Revaluations every year are unnecessary for items of PPE with only insignificant movements in fair value. For items that usually experience significant and volatile movements in fair value, annual revaluations are necessary. It is important that revalued amounts do not differ materially from fair values as at the balance sheet date.

Comparison of the cost model with revaluation model:

Illustration:

Depreciation is charged on a straight line basis over the useful life of the asset. The residual value is Rs. nil
Depreciation charge for the subsequent year 2012 under revaluation model shall be Rs.115 (i.e. the carrying value of Rs.920 amortised over balance period of asset 8 years)

Intangible    assets:

IAS 38 deals with accounting for intangible assets. An intangible asset is an identifiable non monetary asset without physical substance. It is identifiable (only) if it is separable or arises from contractual or other legal rights. An intangible asset should be controlled by the entity and should expect to get future economic benefits.

Initial recognition:

Like PPE, an intangible asset is initially measured at cost plus directly attributable expenditure incurred in preparing the asset for its intended use. Expenses incurred in training, initial operating losses should  be expensed as incurred.

An entity may either acquire or internally generate an intangible asset. An intangible asset maybe internally generated through research and development. Research costs are required to be expensed as incurred. If an internally generated intangible asset arises from development phase of a project, directly attributable expenses should be capitalised from the date that the entity is able to demonstrate:

  • The technical feasibility of completing the intangible asset so that it will be available for use or sale;

  • Its intention to complete the intangible asset and use or sell it;

  • Its ability to use or sell the intangible  asset;

  • How the intangible asset will generate probable future economic benefits;

  • The availability of adequate technical, financial and other resources to complete the development and to use or sell the intangible asset; and

  • Its ability to measure reliably the expenditure attributable to the intangible asset during its development.

Expenses on internally generated brands,”r’ mastheads, publishing titles, customer lists are ‘not capitalised since such expenditure cannot be distinguished from developing the business as a whole. However, such intangibles are recognised when acquired in a business combination (acquisition). Hence, such internally generated, technology related or customer-related intangibles could form a part of the consolidated books of the acquirer entity although they do not meet the recognition criterion in the separate financial statements of the acquired entity. These principles are set out in IFRS 3 — ‘Accounting for business combinations’ .

There are certain expenses which should be expensed as incurred regardless of whether the criteria for recognition appear to be met:

  • Internally generated goodwill
  •  Training activities
  •  Start up costs
  • Advertising and promotional costs
  • Expenditure on relocating or reorganising part or all of an entity

Principally, there are no differences between IAS 38 and AS 26 relating  to the identification  and recognition of intangible  assets. However,  with IFRS 3 in the picture,  the recognition  of some intangibles  in the consolidated financial statements of a group due to fair  value accounting  for business  combinations lead to differences between the two GAAPs.

Subsequent measurement:

The key difference between Indian GAAP and IFRS here is that IFRS recognises that an intangible may have an indefinite useful life and hence need not be amortised. However, the term ‘indefinite’ does not mean ‘infinite’. An intangible asset has an indefinite useful life when, based on an analysis of all the relevant factors (e.g., legal, regulatory, contractual), there is no foreseeable limit to the period over which the asset is expected to generate net cash inflows ‘for the entity.

Under Indian GAAP, an intangible asset has to be amortised over a maximum period of ten years unless a longer period can be justified. However, it does not give the option of not amortising the intangible altogether or considering an indefinite useful life.

An intangible asset with a finite useful life is sub-sequently amortised on a systematic basis over its useful life. Goodwill and intangible assets with an indefinite useful life are measured at cost or revalued amount less accumulated impairment charge. If an intangible asset is not amortised, its useful life must be reviewed at each annual reporting date to determine if the useful life continues to be indefinite.

The method of amortisation used should reflect the pattern of consumption of economic benefits. The method of amortisation used should be reviewed at each annual reporting date and any change in method should be accounted for prospectively as a change in estimate.

Intangible assets may subsequently be measured at fair value only if there is an active market. An active market exists if the items traded are homo-geneous, there are willing buyers and sellers and information on price is available. Under Indian GAAP, revaluation of intangible assets is not permitted. However, in practice, since an active market for intangible assets does not exist for most intangible assets, revaluation would typically not be permitted in the Indian context.

Acquired goodwill and intangible assets with an indefinite useful life will have to be tested annually for impairment or whenever there is a trigger for impairment. In a subsequent article, we will discuss the various impairment monitoring and measurement requirements under IFRS (IAS 36).

Conclusion:

The basic principles of accounting for PPE and intangibles under IFRS are not new to Indian GAAP. Concepts like component accounting and revaluations have been existing in the current Indian accounting framework. However, IFRS gives out clear principles and guidance in these matters. It aims at consistency in application of policies and accounting for PPE based on their composition.

PPE is one area that would need significant efforts and time for computations in order to converge with IFRS.

IFRS — Closer to economic substance of the transaction

IFRS

One of the important aspects of convergence is that financial
reporting will be better aligned to the true economic substance of a
transaction. ‘Substance over form’ is one of the most important principles on
which International Financial Reporting Standards (‘IFRS’) are based. Detailed
Implementation Guidance (IG) and Basis of Conclusion (BC) for the accounting
treatment prescribed in the respective standards explain the underling economic
rationale for such treatment, which acts as a guide in implementation of the
intent behind the standards.

In general, Indian GAAP also tends to be principle focussed.
However, there are a number of areas where accounting guidance deviates from the
underlying economic substance (e.g., accounting for business
combinations, service concession arrangements or multiple element deliverables)
or in other situations tends to be prescriptive in nature (e.g.,
accounting for loan impairment losses by a bank, accounting for depreciation on
property, plant and equipments based on minimum rates prescribed). Similarly,
accounting is often governed by the terms of the legal contract.

This article highlights some of the important areas where the
accounting under IFRS is closer to the economic substance of the transactions as
compared to Indian GAAP.

Revenue arrangements with multiple deliverables (IAS 18) :

IAS 18 requires, in certain circumstances, to apply the
recognition criteria to each separately identifiable component of a single
transaction in order to reflect the underlying substance of the transaction.
Thus, under IFRS, multiple deliverable transactions (e.g., product sales
and subsequent servicing) are viewed from the perspective of the customer. What
does customer believe that he is buying ? If the customer believes that he is
buying a single product, the recognition criteria should be applied to the
transaction as a whole. Conversely, if the customer believes that there are a
number of elements to the transaction, then the revenue recognition criteria is
applied to each element separately.

Similarly, in certain cases the standard requires the
recognition criteria to be applied to two or more transactions together when
they are linked in such a way that the commercial effect cannot be understood
without reference to the series of transactions as a whole. Once again, the
focus is on the substance and the economic rationale for the transactions.

Example

Entity A sells software with an annual maintenance service
for a total consideration of Rs.1000. Entity A also provides similar annual
maintenance service to other customers at a consideration of Rs.200. In this
case, the sale of the software and maintenance contract would be regarded as
separate components. Revenue from the sale of the software Rs.800 (1000 — 200)
will be recognised when the software is delivered and other revenue recognition
principles are met, and revenue from rendering of maintenance services will be
recognised on a straight-line basis over one year. Now consider a situation
where the same contract is structured in a different manner and the sales
contract itself provides that the ‘price’ of the software is Rs.900 and the
price of the annual maintenance service is Rs.100. Typical practice under Indian
GAAP is to recognise revenue of Rs.900 upfront and recognise only Rs.100 as the
revenue over the maintenance period. Thus, what gets accounted is the legal form
of the contract and not the true economic substance of the sale transaction.
However under IFRS these two transactions will be linked together and each
component i.e., sale of software and annual maintenance service will be
accounted at its fair value i.e., Rs.800 and Rs.200 irrespective of the
values denominated in the contract, thereby reflecting the true economic
substance.

Consolidation based on control (IAS 27, IAS 28 and IAS 31) :

Definition of control under Indian GAAP is different from the
definition under IFRS. Indian GAAP permits consolidation based on the
ownership of majority of voting power or the ability to control the
composition of Board of Directors. Thus, under Indian GAAP it is possible for
two entities to have ‘control’ over one investee company and both companies will
need to account the investee as a subsidiary.

The definition of control under IFRS has two parts, both of
which need to be met in order to conclude that one entity controls another :

(a) ‘the power to govern the financial and operating
policies of an entity’

(b) so as to obtain benefits from its activities.

The implication of the control principles under IFRS is that
companies cannot consolidate an entity only based on holding of current voting
interests. Since consolidation is based only on control, only one holding entity
will practically be able to demonstrate such control and hence there will never
be a scenario where the same entity is being consolidated by two separate
holding entities as a subsidiary.

Under IFRS, rights of each shareholder need to be carefully
evaluated by examining the shareholder’s agreement to determine the entity,
which has control, for consolidation. For example, an entity may own more than
50% of the voting rights in another entity and accordingly is able to
consolidate that entity with itself, currently under Indian GAAP. However due to
certain veto rights given to minority shareholders contractually, it may not be
in a position to unilaterally control that entity, and therefore may not be able
to consolidate that entity under IFRS as a subsidiary.

Example :

Two companies A and B come together to form a company X in
which company A holds 75% with 3 directors on the board of company X and company
B holds 25% with 2 directors on the board of company X. By virtue of majority
holding, company A consolidates Company X as a subsidiary under Indian GAAP. The
Articles of Association of company X states that for certain decisions, a
unanimous approval of the board of directors is required. These decisions
include approving the annual and semi-annual budgets of the company and
selection and appointment of senior management personnel. In such a case, under IFRS, company A does not control company
X, instead it shares joint control over it along with company B. Hence it shall
not consolidate company X as a subsidiary but account for it as a joint venture
arrangement. However, under Indian GAAP, A would continue to consolidate X,
though it does not have control over the operations, which do not reflect the
true economic substance of the transaction.

Acquisition method of accounting for business combinations (IFRS 3) :

Business combinations are the acquisitions of controlling stakes in entities and businesses like mergers, acquisition of a subsidiary or purchase of net assets of a division. Indian GAAP has limited guidance on the first-time accounting for such transactions and allows the pooling of interests method or the purchase method of accounting; IFRS recognises only the acquisition method for accounting for these transactions. Hence under IFRS, all business combinations are accounted for at fair value as on the acquisition date (excluding the specific scope ex-emptions given in the standard). This process involves the identification of intangibles subsumed within goodwill like customer relationships, favourable leases; fair valuation of contingent liabilities, contingent consideration and all other acquired assets and liabilities whether recognised or unrecognised in the acquiree’s balance sheet.

The objective of this accounting is to ensure that all items where the acquirer saw value and hence paid for it, are brought onto the books of accounts at their fair values. This would ensure appropriate reflection of the factors that affected the negotiation process of the transaction in the financial statements and bring accounting closer to the economic attributes inherent in the business combination.

Initial recognition of financial assets and liabilities at fair value (IAS 39) :

Under IFRS, initial recognition of all financial assets and liabilities is mandatorily required at its fair value. This helps in reflecting the true substance of a particular transaction. Consider the following situations:

  • Low interest loans given to subsidiary: Under Indian GAAP these are accounted at transaction value, however, under IFRS these are recorded at the fair value and the initial loss is considered as an investment in the subsidiary and the subsidiary accounts for it as a capital contribution. In the subsequent years the unwinding of the initial fair value loss is treated as an interest income by the parent and interest expense by the subsidiary.

  • Low interest loans given to employees: Under Indian GAAP these are accounted at transaction value, however, under IFRS these are recorded at the fair value and the initial loss is accounted as an employee cost based on the loan terms, thereby reflecting the true intent of compensating the employees in the financial statements.

  • Interest-free  security deposit for leased premises: Under Indian GAAP these are accounted at transaction value, however, under IFRS these are recorded at the fair value and the initial loss is accounted as a prepaid rent, which is amortised over the lease period, thereby reflecting the true operating expense (rental expenditure) in the financial statements.

  • Sales tax deferral schemes: Under Indian GAAP these are accounted at transaction value, however, under IFRS these are recorded at the fair value and the initial gain is accounted as a government grant, which is deferred over the grant period, thereby reflecting the true operating results of the company each year.

Contracts denominated in ‘third currencies’ (IAS 39) :

Sale or purchase contracts in the ordinary course of business may include payment terms denominated in a third currency i.e., a currency which is not the currency of either of the contracting parties. In such circumstances, the foreign currency element in the contract should be accounted for separately from the underlying contract, unless the payments required under the contract are denominated in one of the following currencies:

  •     the currency’ in which the price of the related goods or service being delivered under the contract is routinely denominated in commercial transactions around the world; and

  •     the currency that is commonly used in contracts to purchase or sell non-financial items in the economic environment in which the transaction takes place.

‘Routinely denominated’, as noted under the first bullet above, should be interpreted narrowly, so that an oil transaction denominated in U.S. dollars is one of the few transactions that qualifies for this exemption.

The separation of foreign currency derivatives would reflect the true risks that the entity has indirectly exposed itself to, on entering into the host contract. Such an embedded derivative is carried at fair value through profit and loss account.

Example:

An Indian entity contracts to lease an aircraft from a US entity for 12 months with prices denominated in Euros. Since Euro is not the functional currency of either of the contracting parties, both the seller and the buyer are indirectly exposing themselves to fluctuations of a foreign currency by way of the underlying contract to lease the aircraft. This would be considered an embedded derivative which requires separation and would be carried at fair value in the financial statements of both the contracting parties until the settlement of the underlying contract i.e., every month the fluctuation in exchange rates attributable to unpaid lease rentals will be recognised in the income statement (like accounting for a notional forward cover to buy Euros for the remaining period) and the monthly lease payments will be recorded based on the INR/ Euro exchange rate on the contract date.

Hence although the host contract would not specify the existence of a derivative; looking at the transaction in substance would result in the identification of an embedded foreign currency derivative (notional forward) and reflect the foreign currency risk that the entity is indirectly exposed to due to the arrangement. The ultimate reporting in the financial statement would result accounting for lease rentals at a fixed rate on the contract date (which is the real commercial transaction) and all other fluctuations in the exchange rate from the contract date to the monthly payment dates will be classified as a foreign exchange gain/loss.

Embedded lease contract (IFRIC 4) :

Companies sometimes enter into normal business transactions that share many features of a lease (lease is defined in paragraph 4 of IAS 17 Leases as ‘an agreement whereby the lessor conveys to the lessee in return for a payment or series of payments the right to use an asset for an agreed period of time’).

Unlike Indian GAAP, under IFRS, all arrangements meeting the definition of a lease should be accounted for in accordance with IAS 17 regardless of whether they take the legal form of a lease. This determination is based on the assessment of whether:

i) the fulfillment of the arrangement (commercial transaction) is dependent on the use of a specific asset or assets; and

ii) the arrangement conveys a right to use the asset.

Examples  of such transactions    include:

  • outsourcing arrangements,

  • take or pay contracts in which purchasers make specified payments regardless of whether they take delivery of the contracted products or services.

Example:

Company A enters in a purchase contract with company B to purchase 1,000 units of C every month @ Rs.25 per unit. Product C can be manufactured on a specific machine M by company B. In case of shortfall every month, company B will compensate company A Rs.10 per unit of short-fall and entire output from machine M is availed by company A.

Under Indian GAAP, the above transaction is accounted as a normal purchase transaction @ Rs. 25 per unit. In case there is a shortfall, the payment amount is expensed as a penalty.

Under IFRS, this transaction is broken into its two constituents i.e.,

1) Lease of machine M given that company A is in substance paying a fixed amount of Rs 10 per unit to company A towards availability of machine for company A

2) Processing charges for manufacture of product C

Service  concessions    arrangement (IFRIC 12) :

IFRS contains specific guidance on public-to-private service concession arrangements under IFRIC 12. It applies to arrangements, wherein the public entity (referred to as grantor) is able to control the use of the infrastructure by specifying the nature of service, the recipient of the service and the price to be charged, and to retain significant residual interest in the infrastructure. In such cases, infrastructure is not recognised as property, plant and equipment of the private entity (referred to as operator) as the arrangement does not convey the use of the public service infrastructure to the operator. The operator, in turn, recognises and measures revenue in accordance with IAS 11 or IAS 18 for the service it performs i.e., construction, up gradation, operation, etc. The operator recognises the consideration receivable based on its nature as a financial asset or intangible asset or partly a financial asset and partly as intangible, based on the specific terms of the arrangement.

Under Indian GAAP, there is no specific guidance and this has resulted in varied practices. Generally, the operator capitalises the infrastructure cost in its books as fixed asset and revenue is recognised as services are rendered with the infrastructure. This asset is depreciated in accordance with the company’s depreciation policy or over the period of the service concession arrangement. Thus the revenue is not recognised as and when the efforts are expended and increases the volatility in the income statement with losses in initial period of a service concession arrangement and higher margins in the later period, which may not reflect the correct economic activity for a given period.

Example:

A grantor awards a concession to an operator to build and operate a new road. The grantor transfers to the operator the land on which the road is to be constructed, together with adjacent land that the operator may redevelop or sell at its discretion. Construction is expected to take 5 years, after which the operator will operate the road for 25 years. During these 25 years the operator has a contractual obligation to perform routine maintenance on the road and to resurface it as necessary, which is expected to be three times. At the end of the arrangement the road will revert to the grantor. The road is to be used by the general public. Toll for use of the road is set annually by the grantor. This arrangement is a public-to-private arrangement as the road is constructed pursuant to general transport policy and is to be used by the public. This would fall under the scope of IFRIC 12. Accordingly the operator will not recognise the road as property, plant and ‘ equipment; however he will recognise an intangible asset for the right to operate the road and collect toll from it.

Deferred taxes on unrealised profits of joint ventures/associates (IAS 12) :

Currently,    under    Indian    GAAP,    profits    of subsidiaries, branches, associates and joint ventures (‘investee companies’) are included in consolidated profits of the parent company. The consolidated performance results and net worth are accordingly reported to the shareholders of the parent under Indian GAAP. However one important aspect that is not reported is the impact of tax leakage when the profit earned by the investee companies will be transferred to the parent. Accordingly the consolidated profit and the net worth reported under Indian GAAP is grossed up to that extent, since the overall tax impact on the consolidated profit available to the parent company is not completely recorded in the books of account. Such deferred tax impact is accounted for in the consolidated financial statements under IFRS.

For example:

Parent company P consolidates undistributed profits of Rs.100 crores of associate company A in its consolidated financial statements. The dividend distribution tax rate in A’s jurisdiction is 15% and dividend received is exempt from tax in the hands of P. In this case, P should recognise a deferred tax liability of Rs.15 crores (at a rate of 15% on Rs.100 crares) in its consolidated financial statements which will ensure a correct presentation of the net worth to the shareholders.

Presentation of financial statements:

In India, Schedule VI of the Companies Act, 1956, which prescribes a detailed format for preparation and disclosure of financial statements, lays great emphasis on quantitative information such as quantitative details of sales, COGS, production capacities, amount of transactions with related parties, CIF value of imports and income and expenditure in foreign currency, etc. Contrary to the same, IFRS if more focussed on qualitative information for the stakeholders such as terms of related party transactions, risk management policies, currency exposure for the Company with sensitivity analysis, etc. To more correctly report the liquidity position of the Company, IFRS requires disclosure of all assets/ liabilities, whether they are current or non-current. Presently under Indian GAAP even long-term deposits and advances are disclosed under current assets,loans and advances, thereby not disclosing the true liquidity profile of the entity.

Conclusion:

IFRS aims to present  financial  statements  which are a reflection of the business and economic environment in which a company operates. The standard-setters strive to formulate principles which would help a company in applying judgment and reaching the ultimate goal of accounting which is closer to the economic value of transactions. This is clearly evident in the above discussions of accounting for business combinations, consolidation, embedded leases, embedded derivatives, etc. However, to achieve this goal, it is important that the principles are applied in their true spirit and in the manner in which they are intended.

Convergence brings a new perspective for Indian companies from the traditional Indian GAAP. It challenges them to look beyond the legal language of arrangements, shifting the focus to the substance of arrangements. Indian companies need to be prepared to face this new age of accounting and keep up with the evolving changes that are taking place in IFRS itself.

Settlement of cases : Abatement : Ss. 2(45), 245C and 245D(2A) & (2D) of I. T. Act, 1961 : Tax on total income means tax on total income after set-off of carried forward loss : Assessee paid tax correctly : No abatement u/s.245D(2) : Application to be pro

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Settlement of cases : Abatement : Ss. 2(45), 245C and
245D(2A) & (2D) of I. T. Act, 1961 : Tax on total income means tax on total
income after set-off of carried forward loss : Assessee paid tax correctly :
No abatement u/s.245D(2) : Application to be proceeded with.


 


[Govind Builders and Developers vs. ITSC : 309 ITR
167 (Bom)].

On 14.09.2006, the assessee made an application to the
Settlement Commission u/s. 245C of the Income-tax Act, 1961 for settlement of
its case for the A. Y. 2004-05. The returned income for that year was a loss
of Rs. 93,112. The assessee had offered an additional income of Rs.53,57,375
in the settlement application. The assessee was also entitled to carried
forward loss of Rs.93,193 of the A. Y. 2003-04. For the purpose of tax payable
u/s. 245D(2A) the assessee arrived at the aggregate total income of
Rs.51,70,820 after reducing from Rs.53,57,375 the returned loss of Rs.93,112
for the relevant year and the carried forward loss of Rs.93,193 of the A. Y.
2003-04. Accordingly it computed the additional tax payable at Rs.18,55,032
and paid Rs.25,59,932 together with interest on 26.05.2007. This payment was
made in compliance with the provisions of Section 245D(2A) of the Act wherein
the last date for payment was 31.07.2007. The Settlement Commission held that
the carried forward loss was wrongly set off and accordingly there was no
compliance of the provisions of Section 245D(2A) of the Act and therefore
declared that the proceedings abated in accordance with the provisions of
Section 245D(2D) of the Act. On 13.11.2007 the assessee paid the difference as
per the decision of the Settlement Commission.

On a writ petition filed by the assessee challenging the
decision of the Settlement Commission, the Bombay High Court held as under :

“i) Section 245D(2A) is mandatory and the additional tax
had to be paid on or before 31.07.2007. The Commission could not condone the
delay or accept the additional amount after 31.07.2007, as the application
itself would stand rejected by operation of law. Once there was no power
with the Commission itself, it was not possible for the Court to act under
the extraordinary jurisdiction under Article 226 read with Article 227 of
the Constitution of India also.

ii) The Settlement Commission, while considering whether
the tax has been paid as contemplated by Section 245D(2A), has to examine
whether that tax is on the total income as disclosed. The tax payable would
be on the income as set out in Section 2(45) of the Act. The assessee was
entitled to carry forward the loss of Rs.92,370. Therefore, the assessee had
correctly paid the tax. Since the assessee could carry forward the loss of
the preceding assessment year, the finding of the Commission that the tax
was not paid was an error of law apparent on the face of the record.
Therefore the finding that the application has abated had to be set aside
and the application had to be proceeded with.”

levitra

Depreciation : S. 32 of I. T. Act, 1961 : A. Y. 1992-93 : Condition precedent : User of machinery : Machinery installed but found defective : Amounts to user of machi-nery : Assessee entitled to depreciation.

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  1. Depreciation : S. 32 of I. T. Act, 1961 : A. Y. 1992-93
    : Condition precedent : User of machinery : Machinery installed but found
    defective : Amounts to user of machi-nery : Assessee entitled to depreciation.



 


[CIT vs. Chamundeshwari Sugar Ltd; 309 ITR 326
(Karn)].

The assessee company was running a sugar factory. For the
A. Y. 1992-93, the assessee company installed pollution control machinery as
per the mandate of the Pollution Control Board. The assessee claimed
depreciation to the extent of the value of the machinery installed. The
Assessing Officer found that the machinery that was installed was found to be
defective during the trial runs, and therefore, held that the machinery was
not used for the purpose of business as required u/s. 32 of the Income-tax
Act, 1961. Accordingly, the Assessing Officer disallowed the claim for
depreciation. The Tribunal allowed the claim of the assessee and held that the
assessee was entitled to depreciation because the machinery was installed and
merely because it did not effectively function that was not a ground to reject
depreciation.

On appeal by the Revenue, the Karnataka High Court upheld
the decision of the Tribunal and held as under :

“i) The interpretation of ‘used for the purpose of
business’ by the Supreme Court in Liquidator of Pursa Ltd. vs. CIT
(1954) 25 ITR 265 lays down that machinery should be installed. The purport
and object of law relating to depreciation as envisaged u/s. 32 of the
Income-tax Act, 1961, has to be meaningfully interpreted, consistent with
the object. When the assessee bona fide installs any machinery but it
becomes defective and non-functional, it cannot be said that it is not put
to use for the purpose of business.

ii) The assessee was entitled to depreciation on the
pollution control machinery.”

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Capital gains : Exemption u/s. 54 of I. T. Act, 1961 : A. Y. 1996-97 : Purchase of two flats and combined to make one residential unit : Exemption u/s. 54 available

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Capital gains : Exemption u/s. 54 of I. T. Act, 1961 :
A. Y. 1996-97 : Purchase of two flats and combined to make one residential
unit : Exemption u/s. 54 available



 


[CIT vs. D. Ananda Basappa; 309 ITR 329 (Karn).]

In October 1995 the assessee sold a residential house for
Rs.2,12,50,000 resulting in long-term capital gain. The assessee purchased two
residential flats adjacent to each other executing two separate registered
sale deeds in respect of two flats situated side by side, on the same day. The
two flats were modified to make it one residential apartment. The assessee
claimed exemption u/s. 54 in respect of investment in the two flats. It was
found by the inspector that the two flats were in the occupation of two
different tenants. The Assessing Officer held that Section 54(1) does not
permit exemption for the purchase of more than one residential premises and
therefore allowed exemption to the extent of purchase of one residential flat.
The Tribunal allowed the assessee’s claim in full.

On appeal filed by the Revenue, the Karnataka High Court
upheld the decision of the Tribunal and held as under :

“i) A plain reading of the provisions of section 54(1) of
the Income-tax Act, 1961, discloses that when an individual or Hindu
undivided family sells a residential building or land appurtenant, he can
invest the capital gains for purchase of a residential building to seek
exemption of the capital gains tax. Section 13 of the General Clauses Act,
1897, declares that whenever a singular is used for a word, it is
permissible to include the plural. The expression ‘a’ residential house
should be understood in a sense that the building should be residential in
nature and ‘a’ should not be understood to indicate a singular number.

ii) It was shown by the assessee that the apartments were
situated side by side. The builder had also stated that he had effected
modifications of the flats to make them one unit by opening the door in
between the two apartments. The fact that at the time when the Inspector
inspected the premises, the flats were occupied by two different tenants was
not a ground to hold that the apartment was not one residential unit. The
fact that the assessee could have purchased both the flats in one single
sale deed or could have narrated the purchase of two premises as one unit in
the sale deed was not a ground to hold that the assessee had no intention to
purchase two flats as one unit. The assessee was entitled to the exemption
u/s. 54.”

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The liability Special Court (Trial of offences relating to Transaction in Securities) Act, 1992. Has precedence over other liability u/s.11(2)(a) — Scope of powers under the Act

The liability Special Court (Trial of offences relating to Transaction in Securities) Act, 1992. Has precedence over other liability u/s.11(2)(a) — Scope of powers under the Act.

    [DCIT v. State Bank of India & Ors., (2009) 308 ITR 1 (SC)]

    The present appeals were filed against the judgment and order of the Special Court constituted under the Special Court (Trial of Offences Relating to Transactions in Securities) Act, 1992 (hereinafter referred to as ‘the Act’) for conducting trial of offences related to transactions in securities. By the impugned judgment and order, the Special Court allowed the application filed by Respondent No. 1, the State Bank of India and directed the appellant to deposit an amount of Rs. 546.22 crores with the Custodian along with interest at 9% per annum. The Special Court while issuing the said direction held that the income-tax liability for the statutory period of the notified party, namely, Mr. Harshad S. Mehta u/s. 11(2)(a) did not at that stage appear to be in excess of Rs.140 crores approximately, subject to further orders that the Court might pass at a later stage. In the impugned judgment and order a further direction was issued that no useful purpose would be served by keeping the amount lying deposited with the Custodian and, therefore, a direction was also issued to the Custodian to pay to the banks, namely, the State Bank of India and the Standard Chartered Bank against their decrees the principal amount, from the amount in deposit with the Custodian as also from the amount that was likely to be coming back from the Income-tax Department. As the said amount was inadequate to fully satisfy the claims of the banks with respect to the principal amount, it was further held that the same would be disbursed by the Custodian on pro rata basis and after receiving an undertaking from the banks to the Court that they would bring back the amount, if so required, on such terms and conditions as may be directed by the Court.

    The issue sought to be raised by the appellant, Income-tax Department by filing the present appeal was whether the Special Court constituted under the aforesaid Act was right in scaling down the priority tax demand by delving into the merits of the assessment orders and by deciding the matter as an appellate authority, which directions according to the appellant were in violation of the decision of the Supreme Court in the case of Harshad Shantilal Mehta v. Custodian, (1998) 5 SCC 1.

    The Supreme Court noted that the subject-matter of the appeal related to the security scam of Harshad S. Mehta and the period relevant to the said scam related to the A.Ys. 1992-93 and 1993-94. The Assessing Officer completed the assessment proceedings for both the aforesaid years in respect of Harshad S. Mehta after gathering information from many sources and after giving an opportunity to the assessee to furnish details/explanations on the same. The Income-tax Officer passed an assessment order assessing the income for the A.Y. 1992-93 at Rs.2,014 crores and for the A.Y. 1993-94 at Rs. 1,396 crores. The assessment orders were challenged before the Commissioner of Income-tax (Appeals) by the assessee and were largely confirmed. Cross-appeals have been filed by the Revenue as also by the assessee for the A.Y. 1992-93, which are pending with the Income-tax Appellate Tribunal, whereas for the A.Y. 1993-94 appeal filed by the assessee is pending for admission. The orders of assessment were largely confirmed by the Commissioner of Income-tax (Appeals) resulting in raising a tax demand of Rs.1,743 crores by the Income-tax Department.

    The Supreme Court observed that in terms of the provisions of S. 11(2)(a) of the Act, the Income-tax Department has first right on appropriation of the assets of Harshad S. Mehta lying in the custody of the Custodian against its tax demand for the A.Y. 1992-93 and the A.Y. 1993-94 as tax component. Therefore, the Income-tax Department is required to be paid in priority over the liabilities payable to the banks, financial institutions and other creditors, particularly for the aforesaid relevant two years which were considered as statutory period.

    In terms of the aforesaid provisions and at the request of the Income-tax Department, the Custodian had earlier released a sum of Rs.686.22 crores to the Department pursuant to various orders passed by the Special Court, which were confirmed by the Supreme Court. The said interim release of funds of Rs.686.22 crores to the Department was subject to filing of an affidavit/undertaking by the Secretary (Revenue), Government of India that the amount would be brought back to the Court/custodian along with interest within a period of four weeks, if so directed by the Special Court.

    In Harshad Shantilal Mehta v. Custodian, (1998) 5 SCC 1 it was held by the Supreme Court that such priority would be restricted to the tax component of the demand for priority period relevant to the A.Y. 1992-93 and the A.Y. 1993-94. The Supreme Court also held that the Special Court cannot sit in appeal over the order of tax assessment but in case of any fraud, collusion or miscarriage of justice in the assessment proceedings where tax assessed is disproportionately high in relation to funds available, the Special Court could scale down the tax liability to be paid in priority.

Applications were filed by the State Bank of India (hereafter referred to as ‘the SBI’) and also by other banks including Standard Chartered Bank (herein-after referred to as ‘the SCB’) before the Special Court seeking direction to scale down the priority demand on the ground that there was gross miscarriage of justice in making an order of assessment in the case of the notified party, namely, Harshad S. Mehta. In the said applications reference was also made to the decrees on admission passed in favour of the banks against Harshad S. Mehta which according to the banks had become final and binding. Relying on the said decrees it was contended on behalf of the banks that passing of decrees prove tha t the concerned money which is assessed as income in the hands of Harshad S. Mehta as his income was, in fact, money belonging to the banks and, therefore, there was a miscarriage of justice as the Income-tax Department had considered the said amount/sum to be the income of Harshad S. Mehta. It was also submitted that miscarriage of justice also crept in, in respect of, additions on account of over-sold securities, unexplained stock and unexplained deposits in banks, etc. The aforesaid applications were heard by the Special Court wherein the Income-tax Department refuted the aforesaid submissions that there has been any miscarriage of justice in making the order of assessment in the case of Harshad S. Mehta. However, the Special Court under the impugned order dated September 29, 2007, accepted the pleas raised by the SBI and other banks in part with a direction to scale down the priority demand in the case of Harshad S. Mehta in the following terms and on the following grounds:

Consequently, it was held that if the above amounts were excluded from the total assessed income of the statutory period, the total income would be reduced to approximately Rs.277 crores, and therefore, it was held by the Special Court that the tax liability of Harshad S. Mehta for the aforesaid two assessment years payable u/s.ll(2)(a) of the Act in no case would exceed Rs.149 crores. In terms of the aforesaid findings and conclusions arrived at by the Special Court, directions were issued directing the Income-tax Department to deposit with the Custodian an amount of Rs.546.22 crores with interest at 9% per annum from the date of receipt of the amounts amounting Rs.686.22 crores, with a further direction that the said amount which is to be deposited by the Income-tax Department along with other amount lying deposited with the Custodian would be released in favour of the banks in terms of observations made in the impugned order.

After considering the legislative provisions of the Act and the judicial interpretation in the decision of Harshad Shantilal Mehta v. Custodian, (1998) 5 SCC I, the Supreme Court held that the following general principles regarding the powers of Special Court while discharging the tax liability emerge:

i) The Special Court has no jurisdiction to sit in appeal over the assessment of tax liability of a notified person by the authority or Tribunal or Court authorised to perform that function by the statute under which the tax is levied. A claim in respect of tax assessed cannot be re-opened by the Special Court and the extent of liability, therefore, cannot be examined by the Special Court.

ii) The claims relating to the tax liabilities of a notified person are, along with revenues, cesses and rates entitled for the statutory period, to be paid first in the order of priority and in full, as far as may be, depending upon various circumstances.

iii) The ‘taxes due’ refer to ‘tax as finally assessed’. The tax liability can properly be construed as tax liability of the notified person arising out of transaction in securities during the ‘statutory period’ of April I, 1991 to June 6, 1992.

iv) The priority, however, which is given u!s. 11(2)(a) to such tax liability only covers such liability for the period April I, 1991 to June 6, 1992. Every kind of tax liability of the notified person for any other period is not covered by S. 11(2)(a), although the liability may continue to be the liability of the notified person. Such tax liability may be discharged either under the directions of the Special Courtu /s.11(2)(c), or the taxing authority may recover the same from any subsequently acquired property of a notified person or in any other manner from the ‘notified ‘person in accordance with law.

v) The Special Court can decide how much of the tax liability will be discharged out of the funds in the hands of the Custodian and the Special Court can, for the purpose of disbursing the tax liability, examine whether there is any fraud, collusion or miscarriage of justice in assessment proceedings.

vi) Where the assessment is based on proper material and pertains to the ‘statutory period’, the Special Court may not reduce the tax claimed and pay it out in full, but if the assessment is a ‘best judgment’ assessment, the Special Court may examine whether the taxes so assessed are grossly disproportionate to the properties of the assessee in the hands of the Custodian, applying the Wednesbury Principle of Proportionality and other issues of the said nature. The Special Court may in these cases, scale down the tax liability to be paid out of the funds in the hands of Custodian. Such scaling down, however, should be done only in serious cases of miscarriage of justice, fraud or collusion, or where tax assessed is so disproportionately high in relation to the funds in the hands of the Custodian as to require scaling down in the interest of the claims of the banks and financial institutions and to further the purpose of the Act. The Special Court must have strong reasons for doing so.

In the light of the above, the Supreme Court observed that the fact that decrees have been obtained by the banks in respect of certain dues of Harshad S. Mehta could not be disputed by the Income-tax Department. It also could be disputed by the Income-tax Department that the amounts for which decrees have been obtained by the banks have become final and binding. But then, it was submitted that the taxes due have been ascertained and arrived at in terms of the provisions of the Act and that the banks have failed to establish by producing the relevant documents on record that the said amount, which is decreed in favour of the bank, has been wrongly included in the income of the notified party for the statutory period.

As the priority in payment of tax liability u/s.11(2)(a) is only for the statutory period and not any other period, the Supreme Court found that the appellant was justified while contending that if the banks had a right, title or interest in the attached property on the date of the Notification u!s.3 of the Act for which decrees had been obtained and if the banks were claiming that the said amount had wrongly been included in the income of the notified party for the statutory period, then the banks were required to show the nexus between the said decreed amount and the amount which was included in the income of the notified party for the statutory period.

Secondly with respect to the issue of duplication of a sum of Rs. 601.22 crores it was contended by the appellant that the same was correlated to the first issue and a finding on the said issue could be given only once the finding with respect to the first issue is arrived at. According to the Supreme Court there was no finding either on the issue of nexus or on the issue of duplication by the Special Court in the impugned judgment. Probably the reason for the same was that the said issues were not raised before the Special Court and even if they were raised before the Special Court the same were not addressed or considered in the manner in which they should have been done.

The Supreme Court was of the view that for the adjudication of the disputes which were raised in the present appeal, a finding on the said issues and questions would be mandatory and the same could not be dispensed with under any circumstances.

The Supreme Court observed that in the absence of relevant documents, neither it would be possible nor would it be appropriate for it to give a finding on the said issues and questions. Therefore in the opinion of the Supreme Court all such disputed questions were required to be decided by the Special Court after giving an opportunity to the parties to place all the relevant documents before it so as to enable it to come to a proper and considered finding.

However, while remanding the matter for a finding on the said issues and questions, the Supreme Court held that if the nexus is shown by the banks between the amounts for which decrees have been obtained, which have become final and binding and the amount which is included in the income in the hands of Harshad S. Mehta by the Department, the same will have to be disbursed to the banks by the Special Court. It also held that on account of over-sold securities if the delivery was given by Harshad S. Mehta and the transaction was complete, only the difference between the payable and receivable would be taken and not the gross amount. How-ever, the issue as to whether the decrees were on account of oversold securities and, if so, was there any duplication or whether the decrees were on account of siphoning of the funds, was required to be adjudicated by the Special Court on appreciation of the relevant documents.

The Supreme Court, however, clarified that so far as the amounts of Rs.253 crores and Rs. 101 crores are concerned, the appellants had not stated that the said amounts were not included in the income of the notified party for the statutory period. The consent decrees obtained in respect of Rs.2S3 crores were not challenged by the appellant, which led the Special Court to believe that the appellant had accepted the settlement and accordingly scaled down the said amount from the income of Harshad S. Mehta. Similar was the case with the amount of Rs.101 crores. Thus, the scaling down of the said amount was upheld and would not be disturbed.

Agreement — Law permits the contracting parties to lawfully change their stipulations by mutual agreement

New Page 1

  1. (a) Agreement — Law permits the contracting parties to
    lawfully change their stipulations by mutual agreement



(b) Income — Accrual — Variation in the contract from an
earlier date would not affect the accrual of income for the earlier period


(c) Penalty for filing untrue estimate — Can be imposed
only if the assessee knew that the estimate was untrue or had reason to
believe that it was untrue.


[CIT v. Sarabhai Holdings P. Ltd., (2008) 307 ITR 89
(SC)]

The assessee, which was previously known as Sarabhai
Chemicals Pvt. Ltd. and has become Sarabhai Holdings Pvt. Ltd. is referred to
as ‘the assessee’ for short.

There was an agreement on February 28, 1977, whereby the
assessee agreed to transfer its industrial understanding and business activity
known as Sarabhai Common Services Division, which was its unit. This was to
take place with effect from March 1, 1997. The unit was sold as going concern
in favour of the assessee’s own subsidiary M/s. Elsope Pvt. Ltd. for a total
consideration of Rs.11,44,10,253.

Under this agreement, the amount of Rs.4.41 crores was to
be set off against the amount due from the respondent-assessee to Elscope Pvt.
Ltd. as consideration for equity shares in Elscope held by the respondent-assesssee.
The balance sale consideration (approx. Rs.6.55 crores ) was to be paid in
eight equal annual instalments, starting with October 1, 1979. Such instalment
was to become payable on the 1st of October each year.

A further agreement was entered into between the assessee
and Elscope on March 4, 1977. This agreement had an interest clause, which was
provided for at the rate of 11% per annum and that it would be payable on the
balance sale consideration which would remain unpaid from time to time.

Elscope, in turn, transferred this industrial undertaking,
purchased by it to its subsidiary Ambalal Sarabhai Enrterprises Ltd. on April
25, 1978, vide the assignment deed of even date. On June 15, 1978, Elscope
wrote to the respondent-assessee proposing modification in terms of payment
and requested, inter alia, that the interest be charged on the deferred
sale consideration from 01.07.1979, instead of 01.03. 1977. It was proposed by
this letter, firstly, that Rs.1.84 crores (approx.) will be payable as and
when demanded by the respondent-assessee and will not carry any interest and,
secondly, that Rs.4.7 crores will be payable in 5 annual instalments, the
first instalment becoming payable on March 1, 1987, and the said amount shall
carry simple interest at the rate of 11% per annum with effect from July 1,
1979. Elscope also offered to secure the amount of 4.7 crores to the
satisfaction of the respondent-assessee.

On 30.6.1978, the proposal sent by Elscope, vide letter
dated June 15, 1978, was decided to be accepted by the assessee and a
resolution to that effect was passed in the meeting of the board of directors.

In keeping with its proposal, Elscope furnished to the
respondent-assessee secured bonds of Ambalal Sarabhai Enterprises Ltd. and as
proposed in the letter dated June 15, 1978, the interest was to start from
July 1, 1979, while , before this interest was to start, the resolution dated
June 30, 1978, was passed, doing away with the requirement of payment of
interest in terms of the earlier agreement dated March 4, 1977.

The assessee received a notice u/s.210 of the Act on
October 17, 1978, requiring it to pay advance tax of Rs.1,22,22,757, while the
second notice was served on December 8, 1978, asking the respondent-assessee
to pay advance tax of Rs.1,28,74,172.

On 14.12.1978, however, the respondent-assessee filed an
estimate, showing nil amount of advance tax payable for the A.Y. 1979-80. It
further filed the returns on June 29, 1979, declaring the total income of
Rs.772 for the A.Y. 1979-80. Insofar as A.Y. 1980-81 was concerned, the
assessee filed the returns on June 27, 1980, declaring a loss of Rs.17,245.
The Assessing Officer passed an assessment order dated September 20, 1982,
determining the total income to be Rs.68,99,202, which included the amount of
interest accrued on the deferred sale consideration, receivable from Elscope.
The Assessing Officer also levied interest u/s.215 of the Act on a finding
that the assessee had failed to pay advance tax. The Assessing Officer also
directed that the penalty proceedings u/s.273(2)(a) and u/s.271(1)(c) of the
Act should be initiated against the assessee.

Insofar as A.Y. 1980-81 was concerned, an addition of
income by way of interest on the deferred sale consideration was taken into
account and the amount of Rs.55 lakhs (approx.) was added to the taxable
income of the assessee.

The Commissioner of Income-tax (Appeals) upheld the
assessment orders in both the assessment years and also confirmed the addition
of interest amount to the income of the assessee. The Appellate Authority
refused to accept the plea regarding waiver of interest by resolution dated
June 30, 1978.

For A.Y. 1979-80 the Tribunal held that the interest had
already accrued vide further agreement dated March 4, 1977, and as such, the
resolution dated June 30, 1978, was of no consequence, as there was no
commercial expediency for making it retrospectively operative. However, it
accepted the plea as regards interest u/s.215 of the Act. The Tribunal viewed
the question involved to be a highly complex issue and held that the mere fact
that the decision had gone against the assessee could not be viewed as being
determinative of the assessee’s liability to pay advance tax.

So far as A.Y. 1980-81 was concerned, the Tribunal held
that the amount of interest could not be included in the income of the
assessee, since the resolution dated June 30, 1978 was passed prior to the
commencement of the relevant accounting year, which was July 1, 1978 to June
30, 1979, and, therefore, it could not be said that the interest income had
accrued.

The Tribunal also held that it was permissible for the
parties to alter the agreement regarding the charging of interest in the wake
of the fact that the said resolution was found to be a genuine resolution. The
Tribunal came to the finding that interest could not have accrued insofar as
A.Y. 1980-81 was concerned.

Section B : Assurance Statement for Sustainability Reporting : Infosys Technologies Ltd.

Compiler’s Note :

    Sustainability Reporting is a global development which is fast gaining importance and momentum in India. Infosys Technologies Ltd. has published its first Sustainability Report for 2007-08 which presents an account of economic performance, innovations in solutions, services and products, environmental initiatives, people engagement, and social responsibility in accordance with the Global Reporting Initiative (GRI) framework. An Assurance Statement on the same was also obtained by the company. The same is reproduced below. (Names of the firm/s giving the report have been omitted).

Introduction

    XYZ has been commissioned by the management of Infosys Technologies Limited (‘Infosys’) to carry out an assurance engagement on the Infosys Sustainability Report, 2007-08 (‘the Report’).

    Infosys is responsible for the collection, analysis, aggregation and presentation of information within the Report. Our responsibility in performing this work is to the management of Infosys only and in accordance with terms of reference agreed with the Company. XYZ disclaims any liability or responsibility to a third party for decisions, whether investment or otherwise, based upon this assurance statement.

Scope of Assurance :

    The scope of work agreed upon with Infosys includes the following :

  • The full Report as well as references made in the Report to the annual report and corporate website;

  •  Review of the Report against Global Reporting Initiative (GRI) Sustainability Reporting Guidelines, 2006 and confirmation of the application level;

  •  Reporting boundary as set out in the Report;

  • Visits to the Infosys head-office in Bangalore and two development centres in India.

    The verification was carried out between April and July 2008.

Independence

    XYZ did not provide any services to Infosys during 2007-08 that could conflict with the independence of our work. XYZ was not involved in the preparation of any statements or data included in the Report except for this Assurance Statement.

Verification Methodology

    Our assurance engagement was planned and carried out in accordance with the XYZ Protocol for Verification of Sustainability Reporting, which is based both on the GRI Guidelines and the AA1000 Assurance Standard. XYZ took a risk-based approach throughout the assurance engagement, concentrating on the issues that we believe are most material for both Infosys and its stakeholders.

    As part of the verification we have :

  •  Challenged the sustainability-related statements and claims made in the Report and assessed the robustness of the data management system, information flow and controls;

  • Examined and reviewed documents, data and other information made available to XYZ by Infosys;

  • Visited the head-office and two development centres located in Banagalore and Chennai;

  • Conducted interview with 42 representatives (including data owners and decision-makers from different divisions and functions) of Infosys;

  • Performed sample-based audits of the mechanisms for implementing the Company’s own sustainability-related policies, as described in the Report;

  • Performed sample-based review of processes for determining material issues to be included in the Report.

  • Performed sample-based audits of the processes for generating, gathering and managing the quantitative and qualitative data included in the Report;

  •  Reviewed the process of acquiring information and economic/financial data from the company’s 2007-08 certified consolidated Balance Sheet.

Conclusions

    In XYZ’s opinion, the Infosys Sustainability Report 2007-08 provides a fair representation of the Company’s policies, strategies, management systems, initiatives and projects. The Report meets the general content and quality requirements of the GRI Sustainability Reporting Guidelines, 2006, and XYZ confirms that the GRI requirements for application Level ‘A+’ have been met.

Materiality : Infosys has demonstrated a formal approach to assessing material aspects and indicators for reporting. XYZ recommends that Infosys identifies more indicators, other than GRI indicators, representing material issues for the Information Technology (IT) sector, and that they are incorporated in the future sustainability strategy.

 Completeness : Within the reporting boundary defined by Infosys, we do not believe that the Report omits relevant information that would influence stakeholder assessments of decisions or that reflect significant economic, environmental and social impacts.

Accuracy : XYZ has not found material inaccuracies in the data verified or instances where data is presented in a way which significantly affects the comparability of data.

Neutrality : XYZ considers that the information contained in the Report is balanced. The emphasis on various topics in the Report is proportionate to their relative materiality.

 Comparability : XYZ recognises that this is the first Sustainability Report published by Infosys, and we commend the Company for its commitment to reporting accurate and comparable data. The Report clearly states that for many indicators, especially the Environment Health and Safety (EHS) indicators, the reported information will be the baseline.

Responsiveness : Infosys demonstrates an active commitment to dialogue on sustainability issues with stakeholders. The expectations expressed by stakeholders through different engagement channels have generally been addressed in the Report.

Opportunities for Improvement

The following is an excerpt from the observations and opportunities reported back to the management of Infosys. However, these do not affect our conclusions on the Report, and they are indeed generally consistent with the management objectives already in place.

(b) An internal verification mechanism should be developed to further improve the reliability of data as well as help improve internal communication on sustainability reporting.

(b) Systems and processes should be strengthened to better facilitate reporting on global operations.

(b) The materiality assessment approach should be further developed and refined to identify appropriate indicators for all material issued identified.

Recovery of Tax — Strangers to the decree are afforded protection by the Court because they are not connected with the decree.

New Page 1

 15 Recovery of Tax — Strangers to the decree
are afforded protection by the Court because they are not connected with the
decree.


[Janatha Textiles & Ors. v. Tax Recovery Officer & Anr.,
(2008) 301 ITR 337 (SC)]

The appellant M/s. Janatha Textiles was a registered firm
with four partners, viz., Radhey Shyam Modi, Pawan Kumar Modi, Padmadevi
Modi and Indira Chirmar. The firm and its partners were in arrears of tax for
the A.Ys. 1985-86, 1986-87, 1987-88, 1989-90. All the demands pertaining to the
A.Ys. 1986-87 to 1989-90 had been stayed by various income-tax authorities and
these demands were never enforced for collection. The demand pertaining to the
A.Y. 1985-86 was alone enforced.

 

The agricultural lands owned by the partners of the
appellant-firm at Bodametlapalem had been attached and sold in public auction on
August 5, 1996, after following the entire procedure laid down under the Second
Schedule to the Income-tax Act, 1961. Nine people participated in the public
auction held on August 5, 1996. The sale was confirmed in favour of L. Krishna
Prasad who offered the highest price. No procedural irregularity or illegality
in public auction process was alleged by the appellant.

 

Even after issuance of sale proclamation, the
respondent-Department issued communication in SR No. 2/94 dated July 15, 1996,
informing the appellants that a sum of Rs.5,68,913 was due as on that date
towards tax, interest and penalty under the 1961 Act. The said amount, however,
does not include interest payable u/s.220(2) of the 1961 Act. The appellant-firm
acknowledged receipt of the letter on July 17, 1996, and had not contradicted
the quantum of tax and interest as mentioned in the said letter. It was made
clear that the demand for the A.Y. 1985-86 alone was being enforced.

 

In an SLP, learned counsel for the appellants contended that
even though they had filed objections at various stages of the notice issued for
the auction sale, the respondent-Department without disposing of the said
objections proceeded with the sale and, therefore, on that ground the sale
conducted by the respondent-Department was illegal and unsustainable. The
appellants further submitted that with reference to the A.Y. 1985-86, the
application for waiver of interest was pending before the authorities and
further the stay application filed before the Commissioner was not disposed of.
Even on that count also the sale conducted by the respondent-Department on
August 5, 1996, was illegal and unsustainable. The appellant contended that the
High Court had failed to notice that the nature of the lands in the auction
notice was wrongly mentioned as dry lands. In fact the said lands were a mango
orchard and building structure and of much higher value. The auction ought to be
vitiated on this ground alone.

 

The appellant also submitted that the appellants had received
the notice of demand as defaulters in their individual capacity and also as the
partners of the firm. However, the respondent-Department had failed to give
notice of demand to the appellants qua their shares. They did not receive
notices indicating their respective shares. It was asserted on behalf of the
respondent-Department that the amount fetched in the public auction was more
than reasonable.

 

The Supreme Court observed that the appellant had never
complained about fixing of the reserve price before holding of auction, though
they were intimated of the same through sale proclamation. In pursuance of the
notice issued by the Supreme Court, the respondent-Department had filed the
counter-affidavit. Respondent No. 2 (auction purchaser) also had filed a
separate counter-affidavit. Respondent No. 2 in the counter-affidavit stated
that it was totally incorrect to suggest that the auction sale did not fetch the
actual market value of the property. Respondent No. 2 also mentioned in the
counter-affidavit that the said lands were agricultural dry lands and there were
no mango gardens as alleged by the appellant. There were, however, a few mango
trees scattered all over the land.

 

The respondent-Department in the counter-affidavit stated
that the appellant-firm had alternative efficacious remedy by way of filing a
petition under Rules 60 and 61 of the Second Schedule to the 1961 Act. The
appellant ought to have availed of the statutory remedy for ventilating its
grievances instead of filing a petition before the High Court.

 

The Supreme Court further observed that there was another
very significant aspect of this case, which pertained to the rights of the
bona fide purchaser for value. The Supreme Court held that the law makes a
clear distinction between a stranger who is a bona fide purchaser of the
property at an auction sale and a decree-holder purchaser at a court auction.
Strangers to the decree are afforded protection by the Court, because they are
not connected with the decree. Unless the protection is extended to them court
sales would not fetch the market value or fair price of the property. The
Supreme Court held that the appeal was devoid of any merit and was accordingly
dismissed.

levitra

Export — Deduction u/s.80HHC — Duty drawback and cash compensatory allowance received in the year other than the year of exports is eligible for deduction u/s.80HHC of the Act in the year of receipt, in a case where assessee is following the cash system o

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 14 Export — Deduction u/s.80HHC — Duty
drawback and cash compensatory allowance received in the year other than the
year of exports is eligible for deduction u/s.80HHC of the Act in the year of
receipt, in a case where assessee is following the cash system of accounting.


[B. Desraj v. CIT, (2008) 301 ITR 439 (SC)]

The appellant was a sole proprietor of M/s. D. R. Enterprises
engaged in the business of export of textiles/fabrics. Consequent upon exports
made by him, inward remittance came into India in foreign exchange during the
accounting year ending 31-3-1991 (A.Y. 1990-91). However, the appellant
recovered cash compensatory allowance of Rs.7,74,785 and duty drawback of
Rs.35,565 in the next accounting year ending on 31-3-1992 (A.Y. 19991-92). The
appellant, who was following cash system of accounting, claimed deduction
u/s.80HHC on the aforesaid amounts in A.Y. 1991-92, that is, in the year of
receipt.

 

According to the AO, admittedly, the appellant had not made
export sales during A.Y. 1991-92 and therefore, the said duty drawback and cash
compensatory allowance did not constitute eligible income deductible from the
gross total income u/s. 80HHC. On appeal, the Commissioner of Income-tax
(Appeals) took the view that the above amounts were admittedly relatable to the
sales made during the earlier year and consequently, the Assessing Officer had
wrongly rejected the appellant’s claim for deduction u/s.80HHC. The Tribunal
upheld the decision of the Commissioner of Income-tax (Appeals).

 

On an appeal by the Department, the Madras High Court
overruled the decision of the Tribunal on the ground that during the A.Y.
1991-92, the assessee had received cash compensatory support and duty drawback
for the exports made in the earlier year and that there were no exports made in
that year and therefore, the said amounts did not constitute eligible income for
deduction u/s.80HHC.

 

On an appeal by the appellant, the Supreme Court
observed that by the Finance Act, 1990 it was clarified that cash compensatory
support and duty drawback would be taxable u/s.28(iiib) and in a Circular issued
by the CBDT it was clarified that export incentives, namely, cash compensatory
support and duty drawback have to be included in the profits of the business for
computing the deduction u/s.80HHC. According to the Supreme Court, with the
issuance of the said Circular, the point was no more res integra.
The Supreme Court after noting the formula for the purpose of computing
deduction u/s.80HHC observed that the business profits included export
incentives. The Supreme Court, therefore, held that the words ‘business profits’
in the formula u/s. 80HHC(3) would include cash compensatory allowance and duty
drawback, and the AO was directed to work out the deduction in accordance with
the law as it stood during the relevant A.Y. 1991-92.

 

 

levitra

Appeal to Appellate Tribunal : Fees : S. 2(45), S. 5 and S. 253(6) of Income-tax Act, 1961 : A.Y. 2003-04 : Total income determined at negative figure : Fees of Rs.500 alone is payable.

New Page 1

  1. Appeal to Appellate Tribunal : Fees : S. 2(45), S. 5 and S.
    253(6) of Income-tax Act, 1961 : A.Y. 2003-04 : Total income determined at
    negative figure : Fees of Rs.500 alone is payable.


[Gilbs Computer Ltd. v. ITAT, 317 ITR 159 (Bom.)]

For the A.Y. 2003-04 the assesse’s total income was
assessed at a loss of Rs.7,18,78,768. While filing appeal before the Tribunal
u/s.153 of the Income-tax Act, 1961 the assessee paid appeal fees of Rs.500.
The registry of the Tribunal communicated the defect inasmuch as the appeal
fee paid was less by Rs.9,500 and called upon the petitioner to rectify the
defect within 10 days. The petitioner did not pay the additional amount.
Therefore the Tribunal dismissed the petitioner’s appeal as unadmitted.

The Bombay High Court allowed the writ petition filed by
the assessee challenging the order of the Tribunal and held as under :

“(i) The expressions ‘more’ or ‘less’ in S. 253(6) of the
Act have to be given their natural meaning. Negative income cannot be
‘more’. It will always be less. In that event the language of Ss.(6)(a)
would be attracted. If the total income can be considered even to be a loss
then the absence of it will not be covered by either clause (a), (b) or (c)
of Ss.(6). It will be clause (d) of Ss.(6) which will apply.

(ii) The petitioner was not obliged to pay the fee in
excess of Rs.500. The petitioner had been admittedly assessed to loss. The
income computed was less than Rs.1,00,000 and, therefore, clause (a) of S.
253(6) would apply.

(iii) If on the other hand, one took the view that clause
(a), (b) or (c) would not apply as they postulate assessment of a positive
figure, only clause (d) would apply and, even so, the fee payable would be
Rs.500. The petitioner was right in paying court fee of Rs.500.”

 



levitra

Circulars — Issued by the Board — It is not open to the officers administering the law working under the Board to say that the Circulars issued by Board are not binding on them.

New Page 1

 17 Circulars — Issued by the Board — It is
not open to the officers administering the law working under the Board to say
that the Circulars issued by Board are not binding on them.


[State of Kerala & Ors. v. Kurian Abraham Pvt. Ltd. & Anr.,
(2008) 303 ITR 284 (SC)]

M/s. Kurian Abraham Pvt. Ltd., the assessee, was engaged in
the business of buying rubber, processing the same and selling the processed
rubber. The assessee purchases field latex (raw material) in Kerala, but since
its processing factories were in Tamil Nadu, it transported field latex to Tamil
Nadu for processing into centrifuged latex and returned it back to Kerala.
Thereafter, the centrifuged rubber was sold by the assessee either locally in
Kerala or inter-State.

With respect to centrifuged latex sold locally, the assessee
claimed exemption from payment of tax on the purchase turnover of field latex
(raw rubber). With respect to inter-State sale of centrifuged latex, the
assessee paid the tax under KGST Act on the purchase of field latex and claimed
exemption in respect of (‘CST’) under Notification S.R.O. No. 173/93 read with
S.R.O. No.215/97. The returns filed by the assessee were accepted by the
Assessing Officer.

They were also accepted by the Department on the basis of
Circular No. 16/98, dated May 28, 1998 issued by the Board of Revenue
u/s.3(1A)(c). Under the said Circular, field and centrifuged latex were treated
as one and the same commodity in view of entry 110 of the First Schedule to the
1963 Act.

During the interregnum, in the case of Padinjarekkara
Agencies Ltd. v. Assistant Commissioner reported in (1996) 2 KLT 641, a
learned single judge of the Kerala High Court took the view that centrifuged
latex is a commercially different product from field latex.

In view of the judgment of the High Court in Padinjarekkara’s
case, notices were issued by the Department proposing to reopen KGST and CST
completed assessments.

The Department also reopened the assessments on the ground
that the assessee had taken field latex and, therefore, the assessee was liable
to sales tax on the sales turnover of centrifuged latex under entry 110(a)(ii)
on the ground that the assessee had sold centrifuged latex brought from outside
the State of Kerala.

Aggrieved by the reopening of the assessments, the
respondent-assessee moved the High Court under Article 226 of the Constitution
for quashing the orders of reassessment, inter alia, on the ground that
they were contrary to the said Circular No. 16/98 issued by the Board of Revenue
(Taxes). The writ petition filed by the assessee stood allowed. Hence, civil
appeals were filed by the Department. The Supreme Court noted that the judgment
of the Kerala High Court in Padinjarekkara’s case related to A.Ys. 1983-84 to
1986-87 during which time Entries 38 and 39 were in force, whereas the present
case was concerned with the A.Ys. 1997-98 and 1998-99 when Entry 110 was in
force. That the structure of Entries 38 and 39 which existed in the past was
materially different from the structure of Entry 110.

The Supreme Court after taking note of Entries 38 and 39
which were substituted from 1-4-1988 and also Circular No. 16/98, dated
28-5-1998 clarifying that with effect from April 1, 1988, the judgment in
Padinjarekkara Agencies’ case cannot have any application for deciding whether
centrifuged latex is a commodity commercially different from latex, the Supreme
Court held that the said Circular granted administrative relief to the business.
It was entitled to do so. Therefore, it cannot be said that the Board had acted
beyond its authority in issuing the said Circular. Whenever such binding
Circulars are issued by the Board granting administrative relief(s) business
arranges its matters relying on such Circulars. Therefore, as long as the
Circular remains in force, it is not open to the subordinate officers to contend
that the Circular is erroneous and not binding on them. The Supreme Court
further held that in the present case, completed assessments were sought to be
reopened by the Assessing Office on the ground that the said Circular No. 16/98
was not binding. Such an approach was unsustainable in the eyes of law. If the
State Government was of the view that such Circulars are illegal or that they
were ultra vires S. 3(IA), which it was not, it was open to the State to
nullify/withdraw the said Circular. The said Circular had not been withdrawn. In
the circumstance, it was not open to the officers administering the law working
under the Board of Revenue to say that the said Circular was not binding on
them.


Note : The Supreme Court has made following observations
in its judgment : “The administration is a complex subject. It consists of
several aspects. The Government needs to strike a balance in the imposition of
tax between collection of revenue on one hand and business-friendly approach on
the other hand. Today, the Government has realised that in matters of tax
collection, difficulties faced by the business have got to be taken into
account. Exemption, undoubtedly, is a matter of policy. Interpretation of an
entry is undoubtedly a quasi-judicial function under the tax laws. Imposition of
taxes consists of liability, quantification of liability and collection of
taxes. Policy decisions have to be taken by the Government. However, the
Government has to work through its senior officers in the matter of difficulties
which the business may face, particularly in matters of tax administration. That
is where the role of the Board of Revenue comes into play. The said Board takes
administrative decisions, which includes the authority to grant administrative
reliefs. This is the underlying reason for empowering the Board to issue orders,
instructions and directions to the officers under it.”

 

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Film production — Amortisation of expenses — Amortisation loss computed under Rule 9A is not subject to provisions of S. 80 and S. 139 of the Act.[CIT v. Joseph Valakuzhy, (2008) 302 ITR 190 (SC)]

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18 Film production — Amortisation of
expenses — Amortisation loss computed under Rule 9A is not subject to provisions
of S. 80 and S. 139 of the Act.

[CIT v. Joseph Valakuzhy, (2008) 302 ITR 190 (SC)]

During the previous year relevant to the A.Y. 1992-93, the
assessee, a film producer, produced two films, namely, (i) Ex Kannikcodi; and
(ii) Santhwanam. While the first film was released and
exhibited for more than 180 days, the second film was released and exhibited for
less than 180 days. In his return of income, the assessee claimed the benefit of
carry forward of Rs.39,43,830 as amortisation expenses relying on Rule 9A(3)
which according to the assessee provided that the cost of production of the film
equal to the amount realised by the film producer by exhibiting the films that
year should be allowed as deduction in computing the profit and loss of the said
previous year and the balance, if any, carried forward to the next following
previous year and allowed as deduction in that year.

The Assessing Officer allowed the amortisation as claimed.
But the Commissioner of Income Tax in exercise of the power u/s.263 of the Act
set aside the order and directed the Assessing Officer to withdraw the benefit
of loss in view of S. 80, as the assessee had not filed his return of income
within the time prescribed u/s.139(3) of the Act.

The assessee filed an appeal to the Tribunal against the
order passed u/s.263. In the meantime, the Assessing Officer passed a fresh
assessment order in terms of the order passed in revision. The assessee filed an
appeal before the CIT(A) against the said order.

The CIT(A) took the view that S. 80 of the Act could not be
applied to the situation to which Rule 9A(3) was applicable. The CIT(A) however
found that the computation of amortisation expenses to be carried forward, as
shown by the assessee was not correct. The CIT(A) directed the AO to obtain
separate accounts in respect of the different films produced by the assessee and
determine the claim of the amortisation in accordance with the Rule 9A,
clarifying that in case there was a loss in respect of the old film on such
computation, that would have to be subject to the provisions of S. 139(3) and S.
80 of the Act. In regard to the second film, it was held that the amortisation
allowance for the next year was not subject to the provisions of S. 80 and S.
139(3) of the Act.

 

Being aggrieved by the order of the CIT(A), the Revenue filed
an appeal before the Tribunal. Both the appeals were taken up together for
hearing by the Tribunal and were dismissed with certain clarifications.

 

The High Court held that the amortisation loss computed under
Rule 9A was not subject to the provisions of S. 80 and S. 139 of the Act.

 

On appeal, the Supreme Court held that the balance cost of
production which amortised under Rule 9A(2) and allowed as deduction for the
next year is not a business loss. Admittedly, the second film Santhwanam was not
exhibited for a period of 180 days in the previous year, and had not covered the
cost of production of the film. The assessee was therefore entitled to carry
forward the balance of the cost of production to the next following previous
year and claim deduction of the same in the year. The Supreme Court therefore
dismissed the appeals.

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The Bombay Chartered Accountant Journal — History & Origins

The Bombay Chartered Accountant Journal

Editorial

The Bombay Chartered Accountant Journal
— History & Origins


Gautam Nayak
Chartered Accountant

The Bombay Chartered Accountant Journal (or BCAJ as it is
commonly referred to), the flagship of the Bombay Chartered Accountants’ Society
(BCAS), is today very much an integral part of the office & practice of most
practising chartered accountants in Western India, besides many others in other
parts of India. It is an institution which has always been around to guide and
help Chartered Accountants in their practice, by sharing knowledge and
experience of its members. Those of us who qualified after 1970 in particular,
have benefitted greatly from the BCAJ.

How has the BCAJ developed and what were its origins ? It
would be interesting to look into the past and to note the contribution of so
many professionals over the generations, which have gone into the making of the
BCAJ as it is today.

The BCAJ in a sense is a reflection of the activities of BCAS
— it has kept pace with the activities of BCAS. As the activities of BCAS have
grown and diversified, so have the contents of the BCAJ, to cater to the growing
needs of its members and the diversifying nature of a CA’s practice.

The origins of the BCAJ were in the form of a small beginning
made by BCAS soon after its formation in April 1950, by issuing cyclostyled
bulletins to its members at various times when there were amendments of interest
to members, such as at the time of the budget, when legislative amendments were
carried out, etc. At that time, the text of these various amendments, including
the Finance Bill, the Finance Minister’s Budget Speech, etc., were not so
readily available or as widely reported as they are today. These bulletins
therefore provided an essential service to practising chartered accountants.
From December 1962, the cyclostyled bulletins were converted into bi-monthly
printed bulletins. These bulletins contained the full text of Tribunal
decisions, which at that point of time were not covered by any tax reports.
However, lack of postal concession for a bi-monthly bulletin dictated the need
for a monthly journal.

From July 1967, the printed bulletins came out in a monthly
form, being the immediate predecessor of the BCAJ in its present bound form.

The beginning :

The first issue of the BCAJ in its present form was published
in January 1969, a year in which P. N. Shah was the President of BCAS. That
issue consisted of 40 pages and was available for an annual subscription of
Rs.18. Shri Sham G. Argade was the first Editor of the Journal and Chairman of
the Journal Committee, with B. C. Parikh as the convenor of the committee, the
other members of the committee being Haren B. Jokhakar, Homi M. Damania and A.
N. Lilani.

Given its origins, this first issue of the Journal was
devoted entirely to direct taxes. It carried the following contributions :

1. An article by D. D. Shah on ‘Is Honest Payment of Taxes
Possible ?’, a subject which is relevant even today;

2. The minutes of the meeting of the Direct Taxes Advisory
Committee, which discussed issues relating to interest on delayed refunds and
unnecessary fixation of hearings (which are problems which continue even 40
years later !);

3. The text of the address of the Chief Justice of India,
P. N. Bhagwati, at the inaugural function of the Gujarat Bench of the Income
Tax Appellate Tribunal;

4. The full text of three decisions of the Income Tax
Appellate Tribunal. This today continues as a feature ‘Tribunal News’, but
with decisions given now in a summarised form;

5. News about the activities of the Society in the form of
‘Society News’, a feature which continues even today; and

6. The text of various notifications and circulars.


The first decade — 1969 to 1978 :

Sham Argade, who had been the Editor of the bulletins, which
were the predecessors of the BCAJ, continued as Editor of the BCAJ throughout
its first decade. It needs to be kept in mind that in those days, in the absence
of computers and with printing not being as high-tech as it is today, the effort
that went into every aspect of production of the journal was much more than that
required today. One can only imagine the efforts put in by Mr. Argade, who put
the BCAJ on a sound and systematic footing during the first few difficult years
of its infancy. One understands that Mr. Argade was almost single-handedly
responsible for the production of the BCAJ in the initial years.

Right from the beginning, one aspect which has contributed to
the consistency, continuity and uniqueness of the BCAJ has been the dedication
and devotion of its regular contributors. Most contributors to the BCAJ have
been contributing regularly for over a decade.

In the issue of May 1969, P. N. Shah contributed his first
article to the BCAJ on the subject of ‘Computation of Income from Salaries,
House Property and Other Sources’. He continues to contribute regularly to the
BCAJ every year ever since then, over a span of 40 years. In fact, in the month
of June 1970, he contributed an article on ‘Amendments in Direct Tax Laws’,
analysing the amendments made to direct tax laws by the budget, a subject on
which he continues to contribute to the BCAJ every year since then. It continues
to be a must-read for every tax professional each year ! This must surely be a
record of sorts for any professional contributor to any professional journal !

Another regular contributor, Arvind H. Dalal first wrote on
the subject ‘Depreciation and Development Rebate’ in the BCAJ of August 1969. S.
E. Dastur also contributed an article on the subject of ‘Penalties under Direct
Tax Laws’ in the BCAJ of June 1970. Pinakin D. Desai first contributed an
article to the BCAJ in April 1977 on the subject of ‘Capital and Revenue’. Ashok
K. Dhere started his contributions to the BCAJ in November 1977, with a
compilation on stamp duties in Maharashtra.

Nirav Shah
Nirav Shah